SEC seeks admission of wrongdoing from JPMorgan in ‘London Whale’ case


The SEC has routinely used boilerplate language that allows defendants to pay fines without acknowledging liability, a policy that has been criticized by some judges. (TIMOTHY A. CLARY/AFP/GETTY IMAGES)
August 8, 2013

The Securities and Exchange Commission is negotiating a settlement with JPMorgan Chase in which the bank would be required to admit wrongdoing in its handling of a multibillion-dollar trading loss initiated by one of its traders, a person familiar with the matter said.

If the SEC gets its way, the deal would apply a standard recently unveiled by SEC Chairman Mary Jo White that demands an admission of misconduct in certain types of civil settlements. The agency has routinely used boilerplate language that allows defendants to pay fines without acknowledging liability, a policy that has been criticized by some judges.

Even before White made the announcement in June, the SEC was eyeing cases that the new policy might be applied to, and the case of the JPMorgan trader, known as the “London Whale,” was among them. A deal is not imminent, said the person familiar with the matter, who asked not to be named because the person is not authorized to speak.

In the spring of 2012, the nation’s largest bank publicly acknowledged that traders in London placed large, risky bets on credit derivatives that resulted in heavy losses. Days after the losses jumped to more than $1 billion, JPMorgan chief executive Jaimie Dimon dismissed concerns about the trades as a “tempest in a teapot.” The trades ultimately cost the bank about $6.2 billion.

A Senate report released in March suggested that Dimon and his team were less than forthright with regulators about the mounting losses. The report accused the bank of hiding losses for three months last year, overstating the value of its trading positions and ignoring red flags. JPMorgan, according to the report, withheld information about the nature of the trading portfolio when regulators made inquiries.

Dimon has admitted that the bank failed to manage its risks, allowing the bad trades to persist, but the outspoken chief executive has not professed any knowledge of traders concealing the losses.

JPMorgan declined to comment about the pending SEC investigation, as did the SEC.

JPMorgan is contending with a flurry of investigations and lawsuits stemming from its massive trading loss.

Congress, the Office of the Comptroller of the Currency, the Federal Reserve, the Justice Department , the Commodity Futures Trading Commission and British authorities are all investigating the bank’s chief investment office because of the trading blunder, according to a public filing. The bank is also battling shareholder lawsuits that allege that it failed to exercise adequate oversight of risky activities in its chief investment office.

The SEC has argued in the past that most defendants would refuse to settle if they had to admit wrongdoing. Many companies and executives would rather fight in court than admit liability and expose themselves to lawsuits, agency officials have said. They said the legal battles would delay compensation to harmed investors — even if the SEC won those cases.

But soon after joining the SEC, White said certain types of cases demand wringing out admissions of guilt and holding defendants accountable. She added, however, that the neither-admit-nor-deny language would continue to be a major tool in the SEC’s arsenal.

Early last year, the SEC tweaked its settlement model to require admissions in cases involving defendants who had entered guilty pleas in related criminal settlements.

A fierce debate about the boilerplate language began about two years ago, when U.S. District Judge Jed S. Rakoff rejected a $285 million settlement that the SEC negotiated with Citigroup, in part because the deal included neither-admit-nor-deny language. The SEC has appealed, and the case is pending before a panel of the U.S. Court of Appeals for the 2nd Circuit.

Citigroup had agreed to settle allegations that it misled investors who bought deteriorating assets in a weakening housing market. But Rakoff ruled that because Citigroup did not admit or deny wrongdoing, he had no way of knowing whether the settlement amount he was asked to approve was too little or too much.

Since then, a handful of other judges have voiced discomfort with allowing defendants to pay fines without admitting liability.

Dina ElBoghdady covers housing policy for The Washington Post.
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