JPMorgan Probe Distances Bank From Trades
July 16, 2012
JPMorgan Chase & Co.’s claim that it found possible employee intent to misprice trades in a unit that lost $5.8 billion may put distance between management and any wrongdoers while providing a road map for U.S. investigators.
“E-mails, voice tapes and other documents, supplemented by interviews” were “suggestive of trader intent not to mark positions where they believed they could execute,” the bank said in a presentation July 13 as it reported net income fell 9 percent to $4.96 billion. “Traders may have been seeking to avoid showing full amount of losses,” the bank said, noting management had concerns about the integrity of the prices used. The bank didn’t provide evidence to support the allegations.
The U.S. Department of Justice and the Federal Bureau of Investigation in New York in May began a probe of the bank’s trading losses, a person familiar with the matter said. The Securities and Exchange Commission and the Commodity Futures Trading Commission, which regulates derivatives trading, are also examining New York-based JPMorgan’s trading activities, according to people familiar with those probes.
The largest U.S. bank by assets restated first-quarter results to reduce net income by $459 million after a review of the prices used in the unit. Yet multibillion-dollar losses and an internal report by the bank are just the beginning of any federal case, said Sam Buell, a former U.S. prosecutor in New York who worked on the Enron Corp. Task Force and is now a professor at Duke University School of Law.
“You can’t just say, ‘hey, this is bad, there are billions of dollars in losses, let’s prosecute someone,”’ Buell said. Eight weeks after Enron collapsed, the company’s board of directors produced a report about what transpired at the energy trader. Prosecutors, however, weren’t able to bring charges for two more years, he said.
JPMorgan’s statement “suggests they are trying to isolate this as a problem that occurred below the management level,” Buell said. Any attempt to reach beyond traders to management would be difficult for prosecutors, he said.
“In U.S. criminal law, we very rarely do hold people criminally responsible for failure to supervise,” he said. “You need to show not only outright knowledge but also willful blindness -- having a strong suspicion that there is wrongdoing and then taking steps to avoid it.”
Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, and Jim Margolin, a spokesman for the FBI’s New York office, declined to comment on JPMorgan’s statements.
Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment on whether the bank was suggesting traders had broken the law. JPMorgan didn’t name any employees involved in the potential mismarking of positions.
The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., was first reported May 30. The trades in question, made by a Chief Investment Office group that included Bruno Iksil, nicknamed the London Whale because his positions grew so large, were on so-called tranches of credit-swap indexes, people familiar with the matter said at the time. All declined to be identified because they weren’t authorized to speak publicly.