JPMorgan Chase has agreed to pay $100 million and admit its traders engaged in reckless behavior to settle Commodity Futures Trading Commission charges that it manipulated markets as part of its so-called London Whale trades on a specific day last year.
The fine and admission of questionable conduct are milestones for the CFTC, which used new authorities granted under the Dodd-Frank Act to curb manipulative conduct. Among other things, the law allows the commission to crack down on those who "intentionally or recklessly" use "any manipulative device" or scheme to defraud other investors.
In the case of JPMorgan, the CFTC argued that the bank sold massive amounts of insurance against corporate defaults on Feb. 29, 2012 that pushed down the price of a related corporate-credit index that day. (Those trades, part of a broader set of corporate-credit derivatives positions that eventually cost the bank more than $6 billion, were ultimately a failed attempt to reverse growing losses.)
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Still, what the CFTC is highlighting as an admission of wrongdoing by JPMorgan in this case is more nuanced than that.
The bank acknowledged the set of facts laid out in the CFTC's order—including that some of its London-based chief investment office traders "acted recklessly" by "employing an aggressive trading strategy" that February. But JPMorgan stopped short of admitting manipulative conduct.
Its hedged acknowledgment could be key for the bank in staving off future related lawsuits.
Wednesday's settlement was complicated by the U.S. government shutdown, now in its third week, which has left the CFTC with only a skeleton staff.
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In addition, one of the agency's four active commissioners, Scott O'Malia, objected to the JPMorgan deal, arguing that the settlement was rushed and that it missed an opportunity to pursue a tougher manipulation case.
"Failure to do so undermines the Commission's integrity and its enforcement powers in favor of taking shortcuts to achieve high-profile settlements," O'Malia stated in a written dissent.
In a CNBC interview shortly after the CFTC announcement, Commissioner Bart Chilton, who voted in favor of the JPMorgan pact, fought back.
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"Some people don't like Dodd-Frank in general," he said, without mentioning O'Malia by name.
Speed was of the essence in this case, Chilton added.
"These markets have changed," he said. "They're not like they used to be. The old standard didn't work so well. This is a significant fine."