JPMorgan Chase has agreed to pay $100 million and make a groundbreaking admission of wrongdoing to settle an investigation into market manipulation involving the banks multibillion-dollar trading loss in London, a federal regulator announced Wednesday, underscoring how far the bank was willing to go to put the blunder behind it.
The Commodity Futures Trading Commission took aim at JPMorgan for trading activity that was so large and voluminous that it violated new rules under the Dodd-Frank Act, the financial regulatory overhaul passed in response to the financial crisis.
The trading commission charged the bank with recklessly employing a manipulative device in the market for swaps, financial contracts that allowed the bank to bet on the health of companies such as American Airlines. The bank sold a staggering volume of these swaps in a concentrated period, the trading commission said.
Unlike other regulatory actions involving the loss, which focused on porous controls and governance practices at the bank, the pact with the trading commission exposed the banks actual trading activity. And the case, which brings JPMorgans tally of fines in the trading loss case to more than $1 billion, was a first for the trading commission. Until now, the commission had never exercised its authority under Dodd-Frank to combat manipulation.
In Dodd-Frank, Congress provided a powerful new tool enabling the CFTC for the first time to prohibit reckless manipulative conduct, David Meister, the agencys enforcement director, said in a statement. As this case demonstrates, the commission is now better armed than ever to protect the market from traders, like those here, who try to defend their position by dumping a gargantuan, record-setting volume of swaps virtually all at once, recklessly ignoring the obvious dangers to legitimate pricing forces.
The banks admission of wrongdoing made the case all the rarer. Banks are typically loath to make such admissions, fearing that an acknowledgment of bad behavior will open the floodgates to litigation from shareholders. But to resolve the investigation, JPMorgan took the unusual step of admitting to facts that the trading commission outlined in its order. In doing so, the bank acknowledged that its traders had acted recklessly.
The concession was the latest, and perhaps most significant, phase of a broader policy shift in Washington, where federal regulators are reversing a practice of allowing banks to neither admit nor deny wrongdoing. That practice, in place for decades, rankled consumer advocates and lawmakers who asked why Wall Street misdeeds generated only token settlements that banks could easily afford.
JPMorgans admission to the trading commission coupled with its acknowledgment to the Securities and Exchange Commission last month that severe breakdowns had allowed a group of traders in London to run up more than $6 billion in losses could provide a template for pursuing other admissions in Wall Street cases.
The trading commission was the sole holdout in settling cases arising from the trading loss, a debacle last year that has come to be known as the London Whale episode. In September, to resolve accusations that the bank had allowed a group of traders to go unchecked as they racked up losses, JPMorgan paid $920 million to four other regulatory agencies the SEC, the Federal Reserve and the Office of the Comptroller of the Currency in the United States, and the Financial Conduct Authority in Britain. The bank, also blamed for not alerting its board and regulators to the gravity of the problem, admitted to the SEC that it had violated federal securities laws. The agency, however, continues to investigate whether senior executives at the bank ran afoul of any civil regulations.
The London Whale case also features a criminal component. In August, federal prosecutors and the FBI in New York announced criminal charges against Javier Martin-Artajo and Julien Grout, two former traders who were accused of covering up the size of their losses. The traders deny wrongdoing. Bruno Iksil, a third trader known as the London Whale for his role in the outsize derivatives bet, reached a nonprosecution deal that requires him to testify against his two former colleagues.
The flurry of federal activity cast a pall over the bank. And the trading commission, by striking out on its own, frustrated JPMorgans efforts to resolve the regulatory cases all at once.
The settlement hinged on whether the bank would admit wrongdoing. JPMorgan, arguing that its trading was legitimate, initially resisted an admission. That prompted the trading commission to draft a potential lawsuit. But talks reopened in recent weeks, paving the way for the admission.