The “London Whale†case presents an interesting contrast in how the government pursues corporate wrongdoing. While two lower-level employees of JP Morgan Chase were formally indicted last week for their role in the credit derivatives trading that caused over $6 billion in losses, the bank itself faced only civil charges that it settled by paying $920 million. No higher level individuals were accused of violations.
The easy explanation, of course, is that the wealthy and powerful avoid their comeuppance while those less fortunate face the wrath of prosecutors. This is a common refrain when the law is enforced against some but not others who appear to be in the same situation, whether it be mom-and-pop stores accused of food stamp fraud or drug laws used primarily against those in the inner city.
The fact is that prosecutors and the police have enormous discretion over who and what to charge, with a decision not to charge a crime virtually unreviewable by the courts. The American criminal justice system puts enormous faith in those who decide how the criminal law is enforced because prosecutors do not have to disclose what went into their decision not to pursue charges.
Last Monday, a federal grand jury in New York returned an indictment of Javier Martin-Artajo and Julien Grout, who worked in JPMorgan’s chief investment office in London and were responsible for valuing the credit derivatives the bank bought that resulted in over $6 billion in losses. The two are charged with conspiracy, false entries in the banks records, false statements to the Securities and Exchange Commission, wire fraud and securities fraud.
Mr. Grout’s attorney asserted his client was only a junior trading assistant who is being made a scapegoat for the trading losses, DealBook reported. The lawyer said, “As the facts in this case are revealed, it will become clear that our client is innocent of any wrongdoing, and we look forward to his vindication.â€
JPMorgan’s settlement with the S.E.C. and three other regulators focused less on how the securities were valued to cover up the losses and more on management’s failures in overseeing the investment office and properly responding to reports of serious problems there. The S.E.C. went so far as to require the bank to admit violations that George S. Canellos, the co-director of its enforcement division, described as “egregious breakdowns in controls and governance†that “put its millions of shareholders at risk and resulted in inaccurate public filings.â€
Both the criminal charges and administrative order involve the same provision of federal law that requires a company to properly record transactions in its financial records and maintain adequate internal controls.
The S.E.C., which has also charged Mr. Martin-Artajo and Mr. Grout in a separate case, identified the failures of what it called “senior management†in reporting problems with the London Whale trading to the audit committee of the bank’s board of directors. That group included the bank’s chief executive, Jamie Dimon, along with the chief financial officer and three other executives.
Yet none was singled out in the administrative order for violations of the securities laws. Mr. Canellos stated, though, that “our investigation is continuing as to individuals.†That is a statement often heard, but whether there is any actual follow up is something rarely seen after a case against a company has been resolved.
When misconduct is described as “egregious,†it is a bit surprising that no individual is identified as being responsible. But the S.E.C.’s use of the term “senior management†shows the problem with pursuing a case against corporate executives in a large organization in which responsibility is diffuse.
Just like the Three Musketeers’ motto of “One for all and all for one,†when everyone is responsible, then it is unlikely that any one individual can be shown to have violated the law. Each has a measure of plausible deniability, and proving anyone acted with the requisite intent is difficult if no individual is willing to admit to a violation and cooperate in the case.
Overcoming the hurdle of proving intent is shown in the case against Mr. Martin-Artajo and Mr. Grout. Prosecutors have not charged a third trader, Bruno Iskil, who actually earned the “London Whale†nickname because of the huge size of his wagers in credit derivatives. They are relying on him to cooperate and prove that his co-workers knowingly masked the size of the losses.
Even though JPMorgan admitted to violations for how it dealt with the reports of improper valuations, it also could have been charged with a crime for the conduct of Mr. Martin-Artejo and Mr. Grout. Corporate criminal liability is quite broad because a company is responsible for any violations by employees when working on its behalf.
While the bank is still being investigated by the Justice Department, I think it is unlikely that charges will be filed against it unless new evidence of misconduct emerges. The typical resolution of a corporate criminal investigation these days is a deferred prosecution agreement in which a company admits to violations and pays a hefty fine. The S.E.C. and other regulators largely secured that outcome in the recent settlements so a criminal case would not add significantly to the punishment of JPMorgan, even if it had to pay a few more millions of dollars.
So what standard makes a case criminal rather than civil, or when individuals should be accused of misconduct or allowed to avoid charges? The answer is left up to the prosecutor, who decides whether there is enough evidence and the best use of available resources.
There is no realistic prospect of judicial review of a decision not to file charges. In Inmates of Attica Correctional Facility v. Rockefeller, a case arising from the Attica prison riot in 1971 in which federal prosecutors did not file civil rights charges for the death of inmates, the United States Court of Appeals for the Second Circuit found that “the manifold imponderables which enter into the prosecutor’s decision to prosecute or not to prosecute make the choice not readily amenable to judicial supervision.†That means there is no recourse if the prosecutor decides not to pursue a case, unless another office steps in and decides to file charges on its own.
The lack of transparency over a decision not to file charges benefits those who were investigated. If prosecutors had to explain why charges were not filed, such a statement could cause significant harm to a person’s reputation with no readily available means to rebut any claimed misconduct.
Yet it remains disquieting when the same actions result in criminal charges for some but only a civil case for others, and no individuals are held responsible for misconduct at a company. In the end, we are left to trust that prosecutors have made good decisions.
