JPMorgan Found to Have Violated Both Banking and Securities Laws in $920 Million Settlement

By Pam Martens: September 19, 2013

Jamie Dimon, Chairman and CEO of JPMorgan Chase, Testifying Before Congress on the London Whale Trading Losses

JPMorgan has reached a $920 million settlement with four of its regulators over the London Whale matter, a high risk trading strategy where bank deposits were used to gamble in illiquid credit derivatives in London.

We now know why JPMorgan has been auditioning the settlement in the press for the past four days: the language in the various settlement documents is harsh, making it crystal clear the company broke both banking law and securities law. But then, the regulators had very little choice; the U.S. Senate’s Permanent Subcommittee on Investigations had effectively already reached those conclusions in a 307-page report it issued on March 14 of this year.

The settlement with the Office of the Comptroller of the Currency (OCC) reads:

“The credit derivatives trading activity constituted recklessly unsafe and unsound practices, was part of a pattern of misconduct and resulted in more than minimal loss, all within the meaning of 12 U.S.C. § 1818(i)(2)(B)”;  and “The Bank failed to ensure that significant information related to the credit derivatives trading strategy and deficiencies identified in risk management systems and controls was provided in a timely and appropriate manner to OCC examiners.”

When the OCC uses the word “bank” in the above citation, it is referring to the insured depository bank – Chase. The law that was broken, 12 U.S.C. § 1818(i)(2)(B), is banking law for FDIC insured institutions. This is where the high risk trading was done, in the insured bank, using insured deposits. It is this aspect that has stunned Congress and brought in the FBI and Justice Department.

The OCC also sets out how it may use these charges again in the future against JPMorgan: “…the unsafe and unsound practices and violations described in Article I of the Consent Order may be utilized by the Comptroller in other future enforcement actions against the Bank or its institution-affiliated parties, including, without limitation, to establish a pattern or practice of violations or unsafe and unsound practices, or the continuation of a pattern or practice of violations or unsafe and unsound practices….”

The SEC focused on JPMorgan’s ineffective internal controls and failure to keep the Audit Committee of its Board informed in a timely manner as required under its own rules and under the Sarbanes-Oxley Act. The SEC also found the company violated securities laws by filing false information with the SEC: “As a result of its failure to maintain effective internal control over financial reporting as of March 31, 2012, and disclosure controls and procedures, and as a result of its filing of inaccurate reports with the Commission (specifically, the Form 8-K filed on April 13, 2012, and the Form 10-Q filed on May 10, 2012), JPMorgan violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-11, 13a-13, and 13a-15 there  under,” the SEC said in its settlement document.

The Financial Conduct Authority of the U.K., which was part of this settlement, said it had received assistance from U.S. regulators as well as the U.S. Department of Justice and the FBI. It is understood that the latter two investigations are still open.

Tracey McDermott, the FCA’s director of enforcement and financial crime said:

“When the scale of the problems at JPMorgan became apparent, it sent a shock-wave through the markets. Maintaining the integrity of markets is a key part of our wholesale conduct agenda. We consider JPMorgan’s failings to be extremely serious such as to undermine the trust and confidence in UK financial markets. 

“This is yet another example of a firm failing to get a proper grip on the risks its business poses to the market. There were basic failings in the operation of fundamental controls over a high risk part of the business. Senior management failed to respond properly to warning signals that there were problems in the CIO.  As things began to go wrong, the firm didn’t wake up quickly enough to the size and the scale of the problems. What is worse, they compounded this by failing to be open and co-operative with us as their regulator.

“Firms must learn the lessons from this incident and ensure that they have business practices, values and culture to control the risks in their businesses.”

The fourth regulator settling claims over the London Whale issue was the Federal Reserve.


Below is a recap of some of our past coverage of the London Whale episode.

Personal Investing Lessons From JPMorgan’s London Whale Debacle 

Despite a multitude of formulas for measuring risk, multiple layers of oversight management, 28 members of a risk management team with titles like Managing Director, Executive Director, and Vice President, it somehow didn’t occur to any of these folks that the number one criteria for a trading investment is that you need to be able to get out of it. Continue Reading

JPMorgan: Poster Child for the Most Dangerous Financial System Since 1929

Last Friday, Senator Carl Levin told the Senate’s Permanent Subcommittee on Investigations that JPMorgan “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.” And here’s the punch line: that’s not even the worst of what JPMorgan did. Continue Reading…

The Other Thing JPMorgan Was Doing In Its Chief Investment Office: Profiting on the Death of Employees

Gambling on high-risk synthetic credit derivatives is not the only area of interest at JPMorgan’s  Chief Investment Office (CIO) – the division that has thus far admitted to losing $6.2 billion in the London Whale debacle. According to Exhibit 81 released by the U.S. Senate’s Permanent Subcommittee on Investigations, Ina Drew, the head of the CIO, was also overseeing the investment of funds in the firm’s Bank Owned Life Insurance (BOLI) and Corporate Owned Life Insurance (COLI) plans – a scheme enshrined by the U.S. Congress in 2006 that allows too-big-to-fail banks as well as many other corporations to reap huge tax benefits by taking out life insurance policies on workers – even low wage workers – and naming the corporation the beneficiary of the death benefit. Continue Reading…

Senate Censors Part of Report on JPMorgan About Its Stock Trading

Throughout the Senate Permanent Subcommittee on Investigation’s 98 exhibits of emails and internal memos on the wild trading schemes at JPMorgan, the word “Redacted” appears.  In a high number of the areas where the material is censored, it concerns trading in the stock market, not the credit market where Bruno Iksil, the trader known as the London Whale, was causing giant ripples and eventual mega losses for the largest bank in the U.S. To date, there has been no media attention to the issue of stock trading within the Chief Investment Office nor has the issue been raised by investigators. Continue Reading

JPMorgan: The House that Jamie Built Looks Much Like the House That Sandy Built

Much of the investing public, and I would venture many members of the research team at the Senate’s Permanent Subcommittee on Investigations that compiled the 307 page report on JPMorgan’s $6.2 billion in losses from the London Whale trade, are unaware that the company’s Chairman and CEO, Jamie Dimon, learned at the knee of the mastermind of too-big-to-fail – former Citigroup Chairman and CEO, Sandy Weill. From 1982 to 1998, Dimon was Weill’s first lieutenant, rising to the rank of President of Citigroup.  Continue Reading

JPMorgan Puts Jamie Dimon Underlings In Charge of Investigating Dimon’s Failures In London Whale Episode 

Yesterday, JPMorgan released a report from its Board of Directors that found [drum roll] that the Board was not culpable in the London Whale episode, it just needed to tweak a few things going forward. London Whale refers to the blowing up of $6.2 billion of insured deposits at JPMorgan’s commercial bank through reckless trading in derivatives in London. Continue Reading

Regulator Says JPMorgan Engaged in Unsafe or Unsound Banking Practices But Preserves Golden Parachutes for Execs

Yesterday, two of JPMorgan Chase’s regulators, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, released the details of their cease and desist consent orders with the mega bank over its lack of proper risk controls in its Chief Investment Office (CIO).  The lapses have led to $6.2 billion in losses thus far. JPMorgan, for its part, made sure its golden parachutes – outsized payments to departing executives –would not be limited by the consent agreement. Continue Reading


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