The financial penalty is staggering. JPMorgan Chase & Co. will pay $920 million for trading losses that shook the financial world last year.
But the bigger price may be a few words rarely uttered in settlements with U.S. regulators: The nation’s largest bank is also admitting wrongdoing.
JPMorgan’s acknowledged failure of oversight in the $6 billion trading loss is a first for a major company since the Securities and Exchange Commission reversed its longstanding practice of allowing firms to pay fines without accepting fault.
The admission, made Thursday as part of a broad settlement with U.S. and U.K. regulators, could leave the bank vulnerable to millions of dollars in lawsuits. The legal burden of proof in such private litigation is lower than in cases brought by the government.
“The floodgates are opening,” said Anthony Sabino, an attorney and business professor at St. John’s University in New York. “This is the kind of thing plaintiffs’ lawyers salivate over.”
Regulators said JPMorgan’s weak oversight allowed traders in its London office to assign inflated values to transactions and cover up huge losses as they ballooned. Two of the traders are facing criminal charges of falsifying records to hide the losses.
Combined, the bank will pay one of the largest fines ever levied against a financial institution: $200 million to the SEC, $200 million to the U.S. Federal Reserve, $300 million to the U.S. Office of the Comptroller of the Currency, and $220 million to the U.K. Financial Conduct Authority.
As part of the SEC settlement, JPMorgan acknowledged that it violated securities laws in failing to keep watch over traders.
The U.S. Justice Department is still investigating the bank for possible criminal violations. And there could be more action to come from the SEC.
George Canellos, co-director of the SEC’s enforcement division, said the agency continues to investigate individuals at the firm. The agency noted that senior executives knew that the trading operation was assigning values to transactions that failed to convey the extent of the losses.
“JPMorgan’s senior management broke a cardinal rule of corporate governance: inform your board of directors of matters that call into question the truth of what the company is disclosing to investors,” said Canellos.
New York-based JPMorgan called the settlements “a major step” in its efforts to put its legal problems behind it. The bank said it cooperated fully with all of the agencies’ investigations and continues to cooperate with the Justice Department in its criminal prosecution of the two former traders.
“We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them,” JPMorgan CEO Jamie Dimon said in a statement.
By requiring the bank to accept some blame, regulators hope it will warn other companies to think twice before taking extreme risks that threaten the broader financial system.
The SEC had faced sharp criticism for taking too soft an approach with its enforcement after the 2008 financial crisis. Banks accused of misleading investors about risky investments ahead of the crisis, including Goldman Sachs, JPMorgan and Citigroup, were allowed to pay fines without admitting or denying fault — a long-standing policy at the SEC.
But that changed with Chairman Mary Jo White. She took over at the agency this year and vowed to end the practice in extreme cases. Now, financial companies face the prospect of either admitting wrongdoing in a settlement or fighting the SEC in court.
JPMorgan was one of the few financial institutions to come through the financial crisis without suffering major losses. But in April 2012, the multi-billion-dollar trading loss surfaced, renewing worries about serious risk-taking by major banks.
The fallout even ensnared Dimon, who initially dismissed reports of the losses as a “tempest in a teapot.” He later acknowledged the magnitude of the losses, admitted to Congress that the bank failed in its oversight and took a multi-million-dollar pay cut.
Three employees in the London office were fired — two senior managers and a trader. The episode also led to the resignation of Ina Drew, the former chief investment officer overseeing JPMorgan’s trading strategy.
Federal prosecutors in New York filed criminal charges last month against Javier Martin-Artajo and Julien Grout. Martin-Artajo supervised the bank’s trading strategy in London, and Grout, his subordinate, was in charge of recording the value of the investments each day. They were charged with conspiracy to falsify books and records, commit wire fraud and falsify filings to the SEC. They also were charged separately in an SEC civil complaint.
Both traders, through their lawyers, have denied any wrongdoing.
Their colleague Bruno Iksil, a trader known as the “London Whale” for the outsize bets he made that could roil markets, had his name associated with the embarrassing loss. No charges were laid against him. Prosecutors say he tried to raise questions about how his colleagues were recording the trades.
The SEC said its $200 million penalty is one of the largest in the agency’s history. The money will go to a fund to compensate investors who were harmed by the bank’s inaccurate financial reports concerning the trading loss, the SEC said.
JPMorgan was also ordered to pay $80 million in fines and about $309 million in refunds for billing customers for identity theft protection they never received. The Comptroller of the Currency and the Consumer Financial Protection Bureau said about 2.1 million credit card customers were affected by the illegal practice.
The Comptroller of the Currency also cited JPMorgan for improper practices in its collection of credit card and other consumer debts, other than mortgages. The agency also said the bank failed to fully comply with a law capping military service members’ interest on consumer loans at 6 percent a year.
JPMorgan promised to correct the problems in both those separate cases.