JPMorgan Chase has reached a preliminary agreement with a federal regulator to settle accusations that a trading blowup in London last year represented reckless behavior in an important corner of the financial marketplace â€" a breakthrough that came after the bank agreed to make a rare admission of wrongdoing.
The settlement with the Commodity Futures Trading Commission could come as soon as this week, according to people briefed on the negotiations who were not authorized to discuss the private settlement talks. Aside from admitting to some wrongdoing, the bank is expected to pay about $100 million to resolve the case, which stems from the bank’s more than $6 billion trading loss known as the “London Whale†debacle.
The deal would cap weeks of negotiations that initially broke down when the trading commission demanded an acknowledgement of wrongdoing from JPMorgan. The agency argued that the bank’s trading was so large that it violated the law. It is illegal for banks to recklessly use a “manipulative device†in the market for credit derivatives, financial contracts that allowed the bank to bet on the health of companies like American Airlines.
The bank, arguing that its trading was legitimate, balked at making such an admission. And the trading commission drafted a potential lawsuit.
But ultimately, the people briefed on the negotiations said, JPMorgan agreed to admit that its trading amounted to illegal market activity on one particular day. The trading commission is likely to reference other trading in its order against the bank, but JPMorgan is expected to neither admit nor deny wrongdoing in those instances.
Although the narrow admission appears to be something of a compromise, it could still set a precedent that exposes the bank to scrutiny whenever it builds a large trading position. To resolve an array of investigations into the trading losses, JPMorgan already paid $920 million to four other regulatory agencies and admitted to the Securities and Exchange Commission that it violated federal securities laws.
The latest deal might offer the Commodity Futures Trading Commission a template for pursuing other Wall Street manipulation cases using its new authority under the Dodd Frank Act.
For years, the agency had to prove that a trader intended to manipulate the market â€" and successfully created artificial prices, an obstacle that deterred the agency from filing such cases. But under Dodd-Frank, the financial regulatory overhaul passed after the crisis, the agency must only show that a trader acted “recklessly.†The agency harnessed that new authority to pursue the JPMorgan activity, where it was unclear whether the traders intended to distort the market.
The bank declined to comment on the settlement talks. The people briefed on the negotiations cautioned that the settlement could face delays since the government is currently shutdown. The trading commission is operating with about 30 employees, a fraction of its roughly 700-person staff.
