In a reversal from recent practice, the Securities and Exchange Commission (SEC) is said to be seeking an admission of fault in a settlement with JP Morgan over the “London Whale” multi-billion trading loss, according to the Washington Post. A deal is not imminent, however.
JP Morgan CEO Jamie Dimon announced the loss in May, which was initially thought to be $2 billion but ballooned to more than $6 billion. While the bank claims that the risky bet was a hedge and therefore permissible under new financial rules, a bipartisan Senate report in March found that it was in fact a proprietary bet, which is banned under the Volcker Rule. The bank is being investigated by Congress, the Federal Reserve, the Justice Department, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, and British authorities over the trade gone bad. It is also dealing with shareholder lawsuits that it failed to exercise adequate oversight of these risky bets.
In most of its big settlements with banks after the financial crisis, the SEC has allowed them to avoid admissions of wrongdoing. But its new chair, Mary Jo White, has indicated that she will move away from that practice. In June she alerted staff and then announced that the agency would begin seeking admissions of fault in some settlements with banks. While it wouldn’t apply to all cases, the new tactic would depend on how much harm was done to investors and how egregious the fraud was, White said at the time.
Shortly thereafter, the agency drafted a list of potential pending cases that could qualify with the hopes of scoring the first guilty admission before Labor Day. The Washington Post reports that the London Whale case was among those on the list.
Both JP Morgan and the SEC declined to comment on the investigation to the Post.
The SEC’s “neither admit nor deny” wrongdoing policy has come under Congressional criticism. Sen. Elizabeth Warren (D-MA) sent a letter to White in which she questioned the practice in May. Meanwhile, Ohio Sens. Sherrod Brown (D) and Chuck Grassley (R) have both pushed the Justice Department on the notion that big banks have become “too big to jail,” and Grassley has accused regulators of giving the banks a “get out of jail free card.”
In general, banks’ misdeeds in the lead up to the crisis have mostly gone unpunished. Prosecutions for financial fraud hit a 20-year low in 2011 while regulators mostly turned to settlements instead. Even those settlements have come with little teeth, as the largest ones, for mortgage and foreclosure fraud, have been rife with problems and allowed banks to game the requirements without helping homeowners.