When JPMorgan Chase agreed to pay $920 million in fines Thursday, the financial goliath also handed federal regulators a significant symbolic victory by admitting that its handling of the disastrous “London Whale” trading losses violated securities law.
The admission came as part of the bank’s settlement with the Securities and Exchange Commission, which recently vowed to break from its routine practice of allowing defendants to pay fines without acknowledging liability. In the past few months, the agency has wrung admissions from a hedge-fund billionaire and now JPMorgan.
“For the SEC, the admission of wrongdoing is largely a political and symbolic victory,” said Erik Gerding, an associate professor at the University of Colorado law school. “It represents a down payment on (SEC Chairman) Mary Jo White’s promise to get more admissions.”
But legal experts say the development does not go far beyond that.
Traditionally, the SEC has shied away from demanding admissions in the deals it negotiates because of the practical consequences: Most defendants would refuse to settle if they had to admit liability. They would rather fight the government in court than admit to misconduct and expose themselves to civil lawsuits. The ensuing legal battles would then delay compensation to investors or risk losing it altogether, agency officials said.
That approach has been sharply criticized by several judges, most notably U.S. District Judge Jed S. Rakoff. He rejected a $285 million settlement that the SEC negotiated with Citigroup, in part because Citigroup did not acknowledge liability. The SEC appealed the decision, and the case is pending before a panel of the U.S. Court of Appeals for the 2nd Circuit.
Enter White. Since taking over the SEC in April, she has taken a more aggressive stance, insisting that defendants in some types of cases be held accountable — in other words, own up to the alleged misconduct or go to court and defend themselves.
On Thursday, the agency reinforced the message by having JPMorgan acknowledge the underlying facts of the SEC’s case. The agency accused the bank of misstating its financial results in the first quarter of 2012, failing to keep a watchful eye on its traders and keeping its board of directors in the dark about key trading problems.
JPMorgan agreed to pay the agency $200 million of the $920 million in fines. The rest will go to the Federal Reserve, the Office of the Comptroller of the Currency and Britain’s Financial Conduct Authority.
Several securities law experts said the admission serves the goal of shaming JPMorgan, improving the SEC’s leverage in future negotiations with alleged wrongdoers and bolstering public confidence for an agency long criticized for being too soft on Wall Street. It even has the potential to change the industry’s behavior, they said.
“Other institutions will now look at JPMorgan and say: We need to benchmark ourselves to make sure we’re not doing what JPMorgan did,” said James Cox, a professor at Duke University School of Law.
But experts also said the admission is a carefully crafted acknowledgment that’s unlikely to be used against JPMorgan in private lawsuits or against its senior managers — none of whom were named in the SEC order filed in administrative court.
Already, six civil cases have been brought by shareholders who lost $6.2 billion last year after JPMorgan traders in London placed bad bets on credit derivatives. Among the traders was one known as the “London Whale” for his outsize trades. Those plaintiffs are unlikely to gain a huge advantage from Thursday’s admissions, several legal experts said.
The factual admissions made by the bank relate to lax internal controls and the failure to ensure the accuracy of its public disclosures, all violations of a regulatory provision that can be enforced only by the government. They do not give investors or plaintiff’s attorneys a right to sue, they said.
Private plaintiffs usually need to prove fraud, and JPMorgan’s admission is a far cry from that, said Adam C. Pritchard, a professor at the University of Michigan Law School.
“It’s an admission that they were careless and should have done a better job with their internal controls,” Pritchard said. “But it doesn’t have serious implications for the private lawsuits they are facing. It’s just an admission of negligence.”