As JPMorgan Settles Up, Shareholders Are Hit Anew

Last week, JPMorgan Chase agreed to pay $920 million to settle civil allegations brought by the Securities and Exchange Commission and other regulators in connection with a multibillion-dollar trading loss that’s come to be known as the London Whale case.

At first glance, it sounded like a lot of money and, frankly, it sounded as if the S.E.C. had a strong case and had exacted quite a settlement.

But look closer and scrutinize the S.E.C.’s 15-page description of its findings. Then think about this: When the S.E.C. says that JPMorgan is “paying” a record fine, where is the money actually coming from?

The answer: shareholders. The same shareholders who were ostensibly the victims of the scandal that already cost them $6 billion. The victims, if you want to call them that, become victimized twice.

“It is perversely inappropriate. You are adding injury to injury. All we’re doing is punishing the shareholders more,” said John C. Coffee Jr., a professor of securities law at Columbia Law School. “This is a case where the victims are the shareholders.”

If you’re wondering why the S.E.C. sought to settle with “the firm” â€" in truth, JPMorgan’s shareholders, who don’t have say in the matter â€" rather than bring cases against the individuals who were responsible for the admitted failures of “the firm,” Mr. Coffee has a skeptical, if not necessarily cynical, theory that bears repeating: “You could have tried to sue some individuals for negligence, but I don’t think those cases they would have easily won.”

Instead, he said, the S.E.C. pursued what he described as “the path of least resistance” by suing the firm itself.

“It is much easier for the S.E.C. to settle for very high penalties which are borne by the shareholders,” he said. “The S.E.C. often desperately needs a victory. This way you can get a victory that you can celebrate.”

But on the merits of the case, the settlement, Mr. Coffee said, begins to look a lot like bribery â€" to some degree, on both sides. Without a strong case against any individuals, the S.E.C. looks as if it held the firm for ransom. And on the other side, the firm’s senior management appears to have bribed the S.E.C., using shareholder money, not to bring cases against individuals.

“It’s a form of self-dealing,” Mr. Coffee said.

He said a chief reason the S.E.C. doesn’t often bring cases against senior individuals is that they are unlikely to settle. Most don’t believe they are guilty and the penalties are too steep, so the agency would be forced to try the case before judge or jury. For a senior manager, “those cases are career-ending,” Mr. Coffee said, “so there’s no chance of settlements.”

This is not a new problem for the S.E.C. It has declined to bring civil cases against many top figures of the financial crisis.

Indeed, the commission’s strategy of suing and then settling cases with banks rather than individuals has become such a sore point that it agreed to its settlement with JPMorgan in front of an administrative judge, who can breezily accept the settlement.

“They are so scared of the Rakoff decision,” Mr. Coffee said.

Mr. Coffee is referring to a decision by Judge Jed S. Rakoff of Federal District Court in Manhattan, who rejected a $33 million settlement that Bank of America had reached with the government over its purchase of Merrill Lynch.

Judge Rakoff had this to say at the time: “The notion that Bank of America shareholders, having been lied to blatantly in connection with the multibillion-dollar purchase of a huge, nearly bankrupt company, need to lose another $33 million of their money in order to ‘better assess the quality and performance of management’ is absurd.”

In the case of the settlement with JPMorgan, the settlement was so perfectly worded to avoid suggesting any wrongdoing that could lead to follow-on suits from investors that “I would infer that they couldn’t have settled this case if you made it about misleading statements,” Mr. Coffee said.

He then declared that there is a reality to litigation and settlements within the government. “The S.E.C. alleges not the facts that it can prove, but the facts that it can settle on.”

Mr. Coffee is not in the camp that JPMorgan’s management was criminally complicit in the scandal. “This is more of a blunder than a crime. Making a poor investment is not a crime,” he said, though, he added, “The cover-up can be.”

Much of the S.E.C.’s case was based on how the firm reacted to learning about the problem trades, rather than the trades themselves. For example, the S.E.C. faulted JPMorgan for not raising red flags with the board’s audit committee for several weeks as senior management tried to understand the extent of the problem.

“Frankly, I’m a little amused,” Mr. Coffee said. “The key sin is they didn’t go to the audit committee. It may be bad corporate governance, but it has nothing to do with the proximate cause of the problem.”

He said the only way he could see additional criminal charges being brought, beyond the indictments of two low-level executives, Javier Martin-Artajo and Julien Grout, would be if they flipped on superiors. But he said he suspected that was unlikely.

In the case of Jamie Dimon, the firm’s chief executive, who originally dismissed concerns about the trades as a “tempest in a teapot,” Mr. Coffee said that while he might make a juicy target for the media, “I don’t think they can go after Jamie Dimon for the ‘tempest in a teapot’ comment. That was a statement of opinion, not fact.” Mr. Coffee said that there was no evidence that Mr. Dimon knowingly misled investors about what he knew.

Ultimately, Mr. Coffee came up with a simple metaphor to describe the case against JPMorgan and the penalty being paid up by shareholders: “This is a case about imposing a fine on someone who suffered a burglary for not taking adequate steps to avoid the burglary.”

Andrew Ross Sorkin is the editor at large of DealBook. Twitter: @andrewrsorkin