The settlements announced Thursday by JPMorgan Chase over the “London Whale†trading included a much-anticipated admission of wrongdoing in its resolution with the Securities and Exchange Commission.
But the bank has been unwilling to make such an admission in dealing with the Commodity Futures Trading Commission, which has notified it of a planned enforcement action for its trading.
If one is willing to admit to violating the law, why agree to settle with one agency but not another?
The answer lies in what JPMorgan actually acknowledged in the S.E.C. case, and how that settlement was carefully structured to limit its potential fallout. But a similar admission in violating the commodities laws, however, could open the bank up to substantial additional liability.
The S.E.C. filed an administrative order against JPMorgan that includes a statement of facts about how it handled information about improper valuations of the derivatives bought by its chief investment office in London. The bank’s admission of those facts reflects a change from the previous S.E.C.’s policy that allowed companies to neither admit nor deny having violated the law. That former policy meant that the settlement could not be used by private parties to advance their own claims.
In the JPMorgan case, the S.E.C. order only claims violations of the books-and-records provision of the federal securities laws. That section requires a company to ensure that its records “accurately and fairly reflect the transactions and dispositions of the assets†and that it has a system of internal controls in place to properly prepare its financial statements.
Although the order adds some details to the mess surrounding how management handled information about the London Whale trading debacle, JP Morgan had already largely admitted to the books-and-records violations in July 2012 when it withdrew its financial statements and said that its internal controls were inadequate. So what the S.E.C. essentially got is something the bank had already owned up to a year ago.
That admission will be of very limited utility to private parties suing the bank for violating the federal securities laws over its disclosures about the trades. There is no reference in the order to the bank engaging in fraud by misleading investors about the value of its investments, even though its faulty review process led it to make statements that were not entirely correct when questions were raised about the trading positions. Most famously, the bank’s chief executive, Jamie Dimon, had once dismissed concerns about the transactions as a “tempest in a teapot,†but the S.E.C. did not address that issue.
A concern with the S.E.C.’s new policy on seeking admissions was that companies would not want to risk the potential consequences of an acknowledgement of a violation because that could be used against it in other litigation. The legal doctrine known as “collateral estoppel†allows a party to use a finding in another case to aid its own claims if it was unable to join that case, which is always true when the S.E.C. brings an enforcement action.
JPMorgan will not have that problem because private plaintiffs cannot sue for a violation of the books-and-records provisions. While they do have standing to seek damages for a violation of the main antifraud provision, Rule 10b-5, there is no hint of an admission about any misstatements or omissions in the administrative order.
So the S.E.C. gets the benefit of an admission of wrongdoing but JPMorgan suffers no appreciable jeopardy to its legal position in private litigation. And by filing the case as an administrative order, there is no need to go before a federal district court judge who might raise questions about the propriety of the settlement. Although JPMorgan has to pay out $920 million to resolve cases with regulators, there is little additional impact from this resolution.
The same can’t be said about the possible enforcement case that the Commodity Futures Trading Commission has said it plans to pursue.
As DealBook reported, the issue is whether the bank’s extensive trading manipulated the derivatives markets in violation of the Commodity Futures Act. That law gives private investors a claim for damages against traders who sought to manipulate the value of futures contracts.
The C.F.T.C.’s focus is on the impact of the actual trading on the markets and whether it artificially affected the price of the derivatives JP Morgan’s London office was amassing. The issue is not how the bank handled information about its position or whether it properly valued its investments, something that comes within the S.E.C.’s purview.
If regulators determine that the trading was a result of market manipulation, then investors who were trading during the period when the London Whale transactions occurred could seek damages for any losses they suffered as a result of JPMorgan’s activities (even though it could be argued that the bank was the ultimate loser, since it lost an estimated $6 billion on trades).
Still, JPMorgan’s potential exposure could be significant if it were to admit to market manipulation in the C.F.T.C. case. In that case, plaintiffs could invoke the collateral estoppel doctrine when seeking damages.
The question is whether the C.F.T.C. will push for an admission similar to what the S.E.C. obtained about market manipulation, or whether it will accept a settlement with the traditional approach that would involve neither an admission nor denial of a violation. For JPMorgan, that difference can be crucial in deciding whether to fight charges of market manipulation or put the London Whale episode further behind it by settling with the agency.
