JPMorgan Chase has agreed to pay $100 million and make a groundbreaking admission of wrongdoing to settle an investigation into market manipulation around the bank’s multibillion-dollar trading loss in London, a federal regulator announced on Wednesday, underscoring the great lengths the nation’s biggest bank will take to put the blunder behind it.
The regulator, the Commodity Futures Trading Commission, took aim at JPMorgan for trading activity that was so large and voluminous that it violated new rules under the Dodd-Frank Act, the financial regulatory overhaul passed in response to the financial crisis. The trading commission charged the bank with recklessly “employing a manipulative device†in the market for swaps, financial contracts that let the bank bet on the health of companies like American Airlines. The bank, the trading commission said, sold “a staggering volume of these swaps in a concentrated period.â€
Unlike other regulatory actions over the loss, which focused on porous controls and governance practices at the bank, the pact with the trading commission exposed the bank’s actual trading practices. And the case, which brings JPMorgan’s tally of fines in the trading loss case to more than $1 billion, was a first for the trading commission. Until now, it never exercised the  Dodd-Frank “anti-manipulation†authority.
“In Dodd-Frank, Congress provided a powerful new tool enabling the C.F.T.C. for the first time to prohibit reckless manipulative conduct,†David Meister, the agency’s enforcement director, said in a statement. “As this case demonstrates, the commission is now better armed than ever to protect the market from traders, like those here, who try to ‘defend’ their position by dumping a gargantuan, record-setting, volume of swaps virtually all at once, recklessly ignoring the obvious dangers to legitimate pricing forces.â€
The bank’s admission of wrongdoing made the case all the rarer. To resolve the investigation, the bank took the rare step of admitting to facts that the trading commission outlined in its order. JPMorgan also acknowledged that its traders acted recklessly.
The concession was the latest, and perhaps most significant, phase of a broader policy shift in Washington, where federal regulators are reversing a decades-long practice of allowing banks to “neither admit nor deny†wrongdoing. That practice rankled consumer advocates and lawmakers, who questioned why Wall Street misdeeds generated only token settlements that banks could easily afford.
JPMorgan’s admission to the trading commission â€" coupled with its acknowledgement to the Securities and Exchange Commission last month that “severe breakdowns†had allowed a group of traders in London to run up $6 billion in losses â€" could provide a template for pursuing other admissions in Wall Street cases. Banks are loath to make such admissions, fearing that an acknowledgement of bad behavior will open the floodgates to litigation from shareholders.
“Admitting to these findings of fact needs to be something part and parcel to these types of settlements,†said Bart Chilton, a Democratic commissioner at the trading commission. “All too often, a firm will neither admit nor deny any wrong doing. That needs to stop.â€
The fine print of JPMorgan’s admission â€" in both the S.E.C. and C.F.T.C. cases â€" provides the bank some cover from private litigation. Rather than admitting market manipulation, the bank is expected to acknowledge a series of facts that the C.F.T.C. will characterize as “recklessly employing manipulative devices.†While it is a small and technical distinction, it could save the bank from an onslaught of shareholder lawsuits.
The trading commission was the sole holdout in settling cases born from the trading loss, a debacle last year that has come to be known as the London Whale episode. In September, JPMorgan paid $920 million to four other regulatory agencies â€" the S.E.C., the Financial Conduct Authority of Britain, the Federal Reserve and the Office of the Comptroller of the Currency. The bank also admitted to the S.E.C. that it had violated federal securities laws. The agency, however, continues to investigate whether senior executives at the bank ran afoul of any civil regulations.
The case also has a criminal component. In August, federal prosecutors and the Federal Bureau of Investigation in Manhattan announced criminal charges against two of the former traders: Javier Martin-Artajo and Julien Grout, who were accused of covering up the size of their losses. The traders deny wrongdoing. Bruno Iksil, a third trader known as the London Whale for his role in the outsize derivatives bet, struck a nonprosecution deal that requires him to testify against his former two colleagues.
The flurry of federal activity cast a pall over the bank. And the trading commission, by striking out on its own, frustrated JPMorgan’s efforts to resolve the regulatory cases at once.
The settlement hinged on whether the bank would admit wrongdoing. The bank, arguing that its trading was legitimate, initially resisted an admission. That prompted the trading commission to draft a potential lawsuit. But talks reopened in recent weeks, paving the way for the admission.
For years, the agency was hamstrung in its pursuit of market manipulation cases. Under existing laws, it had to prove that a trader intended to manipulate the market, and successfully created artificial prices.
That high burden deterred the agency from filing. And even when cases were filed, they rarely panned out. In fact, according to Mr. Chilton, the agency has successfully litigated only one manipulation case in the agency’s 38-year history.
But under Dodd-Frank, the agency must show only that a trader acted “recklessly.†The agency harnessed that new authority to pursue the JPMorgan trading, where it was unclear whether the traders had intended to distort the market.
Mr. Chilton argued that there is room for improvement. The agency, he said, lacks authority to impose huge fines.
“I still seek a statutory change from our current puny penalty regime,†he said.
