Security and Exchange Commission to Press JPMorgan to Admit Wrongdoing

Birmingham Mayor Larry P. Langford was indicted on federal charges recently. The former chair of the County Commission, he is charged with accepting money illegally in relationship to a bonding proposal involving JPMorgan Chase and Goldman Sachs., a photo by Pan-African News Wire File Photos on Flickr.

S.E.C. Is Said to Press JPMorgan for an Admission of Wrongdoing

BY BEN PROTESS AND JESSICA SILVER-GREENBERG
New York Times

Federal regulators are seeking to level civil charges against JPMorgan Chase and extract a rare admission of wrongdoing from the nation’s biggest bank as an investigation into a multibillion-dollar trading loss enters its final stage.

If JPMorgan concedes to some wrongdoing in a settlement, such an admission would set an important precedent for the Securities and Exchange Commission, coming after decades of allowing defendants to “neither admit nor deny wrongdoing.” A pact could come as soon as this fall, according to people briefed on the case, who added that the agency had not threatened to charge JPMorgan executives in the case.

The losses in the case — which have now swelled to more than $6 billion — stemmed from outsize derivatives wagers made by traders at JPMorgan’s chief investment office in London.

The S.E.C. has scrutinized the bank over whether the London traders falsified records to hide the losses from executives in New York. The S.E.C., the people said, could cite the bank for lax controls that allowed the traders to lowball the value of the bets.

The bank is also bracing to pay a fine to a financial regulator in Britain, one person said.

The inquiries have heated up in recent months, the people said, as government authorities secured the cooperation of a former JPMorgan trader, Bruno Iksil, who came to personify the botched trade. Mr. Iksil — who earned the nickname the “London Whale” because of the unusual size of the bet — has met with authorities in Brussels and New York.

As the S.E.C. inquiry progresses, a parallel criminal investigation is also ramping up. The F.B.I. and federal prosecutors in Manhattan, after uncovering internal e-mails and phone recordings, are examining whether the traders knew the losses would amount to more than the $2 billion estimate the bank initially provided to investors on May 10, 2012, say the people briefed on the matter, who spoke on the condition of anonymity.

When federal investigators met this spring with Jamie Dimon, the bank’s chief executive and chairman, some of the e-mails enraged him, said people briefed on the meeting. Mr. Dimon, who is not suspected of any wrongdoing, told investigators that he was unaware traders were obscuring the losses when he held the May 10, 2012, call.

Still, the trading losses left a rare stain on the bank’s reputation. The traders in London had breached the bank’s own risk limits to make their credit derivative trades — pointing to a lack of controls at a bank once hailed for its risk management.

The trading blowup, which came at time when regulators were writing rules to curb risk-taking on Wall Street, added fuel to the debate over how much the banks needed to be reined in. Mr. Dimon was called before Congressional hearings and his annual compensation was cut in half. The losses also claimed the jobs of several senior JPMorgan executives.

Yet it is hardly JPMorgan’s only legal woe. Losing its status as Washington’s favorite bank, JPMorgan has drawn scrutiny over the last couple years, including inquiries from at least eight federal agencies, a state regulator and two European nations. In addition to the trading loss, the authorities are investigating the bank in connection with its financial crisis-era mortgage business. The bank, for example, disclosed on Wednesday that it faced a criminal and civil investigation from federal prosecutors in California, who questioned whether it sold shoddy mortgage securities to investors before the financial crisis.

JPMorgan declined to comment, as did an S.E.C. spokesman.

The investigation into the trading losses hinges on the traders in London. As their bet worsened, the traders started to underestimate the losses, according to JPMorgan’s own assessment of the trade.

Under federal rules, traders have leeway to value their losses. Yet, according to a Senate subcommittee report that investigated the trading losses, the traders moved from marking the value in a “middle range” to some of the most generous possible figures.

The report, published in March, cited the bank’s internal e-mails and phone recordings, some of the same evidence that the S.E.C. is poring over.

In one phone call last year, the London Whale, Mr. Iksil, told a colleague that the bank’s estimated losses were “getting idiotic.” Mr. Iksil added that “I can’t keep this going” and that he did not know where his boss in London “wants to stop.”

A junior trader in London, the subcommittee said, also told Mr. Iksil in a recorded conversation, “I am not marking at mids as per a previous conversation.”

Part of the problem, government investigators suspect, was that the traders’ mounting concerns were not relayed to the upper echelons of the bank. JPMorgan’s controller, for example, issued an internal report in May 2012 that essentially cleared the traders of wrongdoing, saying their valuations were “consistent with industry practices.”

Mr. Dimon has apologized for relying on such assurances from his deputies. And last July, the bank restated its first-quarter 2012 earnings downward by $459 million, conceding errors in the valuations.

“We questioned the integrity of those trader marks,” Douglas Braunstein, then the bank’s chief financial officer, said at the time.

As JPMorgan hashes out its settlement with the S.E.C., the bank is negotiating over the language of the charges. If JPMorgan admits to wrongdoing related to the traders’ improper bookkeeping, among other problems, the move could encourage shareholder lawsuits against the bank.

The rare push for an admission of wrongdoing stems from a policy change championed by the S.E.C.’s new chairwoman, Mary Jo White, a former federal prosecutor and Wall Street defense lawyer.

The leaders of the S.E.C. enforcement unit, George Canellos and Andrew Ceresney, detailed the shift in a memo in June, saying some cases might “justify requiring the defendant’s admission of allegations in our complaint.”

Yet, in a twist, Mr. Ceresney and Ms. White have recused themselves from the JPMorgan case, according to the people briefed on the matter. They did so because of their past ties to JPMorgan: both represented the bank in private practice.

Mark Scott contributed reporting from London