More than a year after a group of traders at JPMorgan Chase caused a multibillion-dollar loss, government authorities imposed a $920 million fine on the bank Thursday and shifted scrutiny to its senior management.
Extracting the fines and a rare admission of wrongdoing from the nation’s largest bank, regulators in Washington and London took aim at a pervasive breakdown in controls and leadership at the bank.
The deal resolves investigations from four regulators: the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency, the Federal Reserve and the Financial Conduct Authority in London.
But the bank has struggled to settle with another regulator, the Commodity Futures Trading Commission, which is investigating whether JPMorgan’s trading manipulated the market for financial contracts known as derivatives. The bank disclosed Thursday that the agency’s enforcement staff has recommended the filing of an enforcement action.
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The regulators who did settle cited the bank for “deficiencies” in “oversight of the risks,” assessment of controls and development of “internal financial reporting.”
The group at JPMorgan tasked with double-checking the traders’ estimated profit and losses was so “under-resourced” and “unequipped,” authorities said, that it consisted of a single employee.
The regulatory orders attributed significant blame to senior management, who failed to elevate concerns about the losses to the bank’s board.
For example, after learning in April 2012 that traders were suspected of underestimating the size of their losses, senior management commissioned reviews of the positions. But they required employees reviewing the trades to keep their work “strictly confidential,” according to the SEC, effectively “impeding the exchange of information.”
That culture of secrecy spread through the bank. In response to concerns from a senior executive about information leaking to the marketplace, an executive in JPMorgan’s investment bank promised that the group investigating the trades “speaks to no one” without “my express approval first.”
Despite the criticism of senior management, not one executive was charged. Still, the SEC explained that its critique of senior management referred to either CEO Jamie Dimon
or other senior officials.
“While grappling with how to fix its internal control breakdowns, JPMorgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information,” George Canellos, co-director of the SEC’s enforcement unit, said in a statement.
Regulators were also kept in the dark, authorities said. In one instance, on an April 2012 conference call with regulators, JPMorgan executives in London omitted details about the seriousness of the loss to “deliberately” reassure the regulators.
“Bank management must also ensure open and effective communication with supervisors so that we can effectively do our jobs,” Thomas Curry, the comptroller of the currency, said in a statement. “Anything less is unacceptable and will not be tolerated.”
The attack on the top rungs of JPMorgan could dent the reputation of Dimon, who won widespread acclaim for navigating the bank through the financial crisis in better shape than its rivals.
“We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them,” Dimon said in a statement. “Since these losses occurred, we have made numerous changes that have made us a stronger, smarter, better company.”
Yet the cases exposed a weaker side of JPMorgan, long known for skillful management of risk. The “severe breakdowns” detailed in the orders, authorities say, allowed the group of traders in London to go unchecked even as they amassed the risky position and later covered up their losses.
“JPMorgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses,” said Canellos, the SEC official.
The SEC also cited JPMorgan for misstating its financial results. In July 2012, the bank restated its first-quarter earnings downward by $459 million, conceding errors in the traders’ valuations of losses.
Federal prosecutors and the FBI in New York have since brought criminal charges against two of the traders: Javier Martin-Artajo and Julien Grout. A third trader — Bruno Iksil, who was nicknamed “the London Whale” for his role in the huge positions — avoided charges and instead struck a nonprosecution deal with the authorities.
Under the deal with the SEC, which also brought civil cases against the traders, JPMorgan took the rare step of acknowledging it had violated U.S. securities laws.
That concession reverses a decadelong policy at the SEC to allow banks to “neither admit nor deny” wrongdoing. It may also expose JPMorgan to private litigation from investors who will seize on the bank’s admissions.
For now, the bank agreed to pay $300 million to the comptroller’s office, and about $200 million to the SEC and each of the other agencies. The comptroller’s office also cited the bank Thursday for separate failings in the way it collected overdue bills from consumers and military members.
The fines, while collectively steep, fall in between what other banks have paid when settling with multiple regulators. And the fines can be seen as a reasonable trade-off for a bank seeking to move past the trading losses.
“The settlements are a major step in the firm’s ongoing efforts to put these issues behind it,” JPMorgan said in a statement.
Even after more than a year of scrutiny over the losses — a congressional committee released a 306-page investigation on the blowup and the bank published its own internal report — the settlements Thursday shed new light on the bank’s failings.
For one, the trading losses stemmed from “woefully deficient accounting controls” in the bank’s chief investment office, including “spreadsheet miscalculations” and the use of “subjective” standards for the traders’ valuations.
For the traders in the bank’s chief investment office in London, problems emerged in early 2012 when losses mounted on their credit-derivatives bet, which allowed them to wager on the perceived health of companies like American Airlines. When losses soared, the government said, the traders deliberately “manipulated and inflated the value” of their positions.
The orders underscore the bank’s slow response to the traders’ actions. Although the traders are accused of masking their losses throughout early 2012, it was not until April that year that senior management caught on to the problem.
At a Saturday meeting in April, according to the SEC, executives learned the traders had inflated the value of their bets by anywhere from $275 million to $767 million.
And in an email, a member of JPMorgan’s senior management noted that disputes over the trade prices were not “a good sign on our valuation process.”
Yet, according to the orders, JPMorgan executives failed to alert the board.
At a meeting in early May with the audit committee of the board, there was “no discussion” of the disparities. The executives also failed to tell the committee that the bank had hired an outside law firm to advise on the problem.
The disclosures to regulators were similarly vague. In its order, the Financial Conduct Authority of London outlined how JPMorgan tried to reassure regulators about the trading losses on an April conference call.
While highlighting that there “had been no material change” to the position in recent days, bank executives in London failed to disclose that the trading portfolio breached stress limits and was expected to lose a big amount that day.
Credit-monitoring refunds ordered
WASHINGTON — Federal regulators Thursday ordered Chase Bank and JPMorgan Chase to refund $309 million to more than 2 million customers for illegally billing them for credit-monitoring services they never received.
Chase also must pay $80 million in fines, submit to an independent audit and strengthen oversight of third-party vendors that manage credit-card “add-on” products that promise to protect customers from identity theft and fraud.
The Consumer Financial Protection Bureau took action after an investigation revealed Chase unfairly charged many customers for the add-on services without or before receiving the customers’ written authorization between October 2005 and June 2012.
Some customers paid monthly fees of between $7.99 and $11.99 for several years even though the add-on services they’d been promised were not performed, according to the bureau.
If the fees caused the customers to exceed their credit limits, they were charged additional fees and interest, the bureau said.
“This enforcement action guarantees an end to these unfair billing practices and requires that Chase completely repay those consumers who were wrongly charged,” Richard Cordray, director of the bureau, said in a statement.
Customers already should have received full repayment, plus interest, either as a direct deposit into their accounts or by check in the mail.
Anyone who thinks they are eligible for a refund but did not receive one should contact Chase.
— McClatchy Washington bureau