Drama continues with JPMorgan Chase’s London Whale trades. For the few who don’t remember, the debacle emerged early last year, when trader Bruno Iksil, now known as the “London Whale,” lost a then-estimated $2 billion as a result of a series of derivatives transactions involving credit default swaps. The trades, supposedly part of a JPMorgan hedging strategy, eventually resulted in a loss of around $6 billion. Fallout from the incident was extensive: the bank’s Chief Investment Officer, Ina Drew, and Achilles Macris, who headed up Iksil’s unit, both left following the trades. The Bank clawed back over $100 million from managers involved, and it cut CEO Jamie Dimon’s 2012 pay in half for his role in the transaction. Iksil has been cooperating with authorities, who last month filed civil and criminal fraud charges against two of his colleagues, Javier Martin-Artajo and Julien Grout.
Yesterday, the SEC announced that JPMorgan had agreed to admit wrongdoing and pay a $200 million penalty — part of a total $920 million in sanctions paid to a number of U.S. and U.K. regulators in connection with the losses. SEC Co-Enforcement Director George Canellos said the bank “failed to keep watch over its traders,” breaking 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.”
This announcement represents the second instance of the SEC trying out its new policy of occasionally requiring admissions of wrongdoing from defendants. Coming fresh on the heels of the confession from Philip Falcone and Harbinger Capital last month, the settlement shows the SEC is committed to making this new approach work, and not just with easy cases and hapless defendants. Some are even deriding Rob Khuzami, Canellos’s former boss and the SEC’s Enforcement director until January of this year, for defending the Commission’s policy of allowing defendants to settle matters without admitting or denying wrongdoing. Binyamin Appelbaum of the New York Times noted on Twitter, “Every time a financial firm admits guilt to the SEC, remember Robert Khuzami and his predecessors insisting confessions are a bad idea.” @BetterMarkets followed up: “Excellent reminder, although he/allies said much worse than bad idea: it would cripple the #SEC & #WallStreet enforcement #LOL.”
LOL indeed. But despite the conspicuous nature of the announcement, JPMorgan is still admitting only to non-scienter-based charges under Sections 13(a) and 13(b)(2) of the Exchange Act. Basically, the bank should have made more accurate public filings and had better internal controls. Serious issues, for sure, but a long way from fraud-based charges. It’s the latter that could open up the bank to private liability that is hard to quantify. So while it may seem like an easy trick now that Mary Jo White is in charge at the SEC to require admissions from major Wall Street institutions – and this case is significant – I suspect two related things. First, this case may be less than meets the eye. If the SEC had charged JPMorgan with fraud here, I cannot imagine it being settled with an admission of wrongdoing. The collateral consequences of doing so are just too high. Second, Khuzami was probably 98% right to defend the SEC’s no admit-no deny policy as fiercely as he did. Acting like the SEC is going to push these banks into admissions of fraudulent wrongdoing without expecting a drastic increase in the number of litigated matters and trials is unrealistic. Getting good, settled results and preserving resources for other matters is still very important to the SEC’s enforcement program.