Don’t get too excited about JPMorgan’s admissions to the SEC
The Securities and Exchange Commission was pretty darn pumped about its $200 million settlement Thursday with JPMorgan Chase, part of the bank’s $920 million resolution of regulatory claims stemming from losses in the notorious “London Whale” proprietary trading. And why not? As George Cannellos, the co-director of enforcement, said in a statement, JPMorgan’s $200 million civil penalty is one of the largest in SEC history. The agency also showed that it’s serious about its new policy of demanding admissions of liability from some defendants. For those of us accustomed to the SEC’s “neither admit nor deny” boilerplate, it’s startling to see the words “publicly acknowledging that it violated the federal securities laws” in an SEC settlement announcement. So let’s permit Cannellos some chest-thumping: “The SEC required JPMorgan to admit the facts in the SEC’s order – and acknowledge that it broke the law – because JPMorgan’s egregious breakdowns in controls and governance put its millions of shareholders at risk and resulted in inaccurate public filings.”
Until the SEC changed its policy in June, enforcement officials had insisted that defendants wouldn’t settle with the agency if they had to admit liability because they feared the collateral consequences of their admissions in private shareholder class actions. JPMorgan is in the midst of fierce litigation with its shareholders, who claim the bank lied about its Chief Investment Office in public filings dating back to 2010. So you might assume that the bank’s SEC admissions seal their win, and now it’s just a matter of how big a check JPMorgan will have to write to settle the case.
But if you look closely at what JPMorgan actually admitted, you’ll see that the SEC settlement won’t be of much use to shareholders in the class action. Don’t misunderstand me: JPMorgan is extremely unlikely to escape from the private shareholder case without paying a lot of money. That’s not because of the SEC settlement, however. As I’ll explain, the bank’s lawyers did a very good job of tailoring JPMorgan’s admissions to the SEC to minimize their impact in the class action. In fact, I suspect that future SEC defendants are going to look at the JPMorgan settlement as a model for how to quench regulators’ thirst for blood without spilling a drop in parallel shareholder litigation.
In the class action, which launched in June 2012, JPMorgan has all but conceded that CEO Jamie Dimon and CFO Douglas Braunstein misspoke when they brushed aside questions about London Whale Bruno Iksil’s losses in the CIO portfolio during an April 13, 2012, call with analysts. Dimon himself has since admitted that he was wrong to characterize the losses as “a tempest in a teapot.” JPMorgan has also already said in corrective filings with the SEC that its internal controls over the CIO’s financial reporting were inadequate. So the big disputes in the shareholder case involve whether Dimon, Braunstein and other senior JPMorgan officials knowingly misrepresented London Whale losses and bank internal controls, and how far back their supposed deception goes. The time frame is of huge significance because it impacts the total losses shareholders can claim. Only shareholders who bought or sold stock during the class period are entitled to damages; in a longer class period, JPMorgan is exposed to more claimants and bigger damages.
Shareholder lawyers from Bernstein Litowitz Berger & Grossmann, Grant & Eisenhofer, and Kessler Topaz Meltzer & Check contend that the bank began deceiving shareholders about under-supervised, high-risk proprietary trading by CIO officials as long ago as February 2010, in its public account of the purpose and activities of the office. According to shareholders, every filing thereafter that described the CIO’s careful hedging trades and JPMorgan’s exemplary internal controls was a lie. The class has cited reports on JPMorgan’s proprietary trading by the Office of the Comptroller of the Currency and a Senate subcommittee to argue that Dimon, Braunstein and former CIO chief Ina Drew knew or should have known that their public statements about the office and its trades were false.
JPMorgan’s lawyers at Sullivan & Cromwell, meanwhile, are trying to limit the class period to a mere month in 2012, from the April 13 teleconference with analysts to the bank’s corrective disclosure to the SEC on May 10. They’ve argued in a motion to dismiss the shareholder case that statements before 2012 aren’t false just because the CIO subsequently lost money. “Even accepting plaintiffs’ inaccurate characterizations of those trades as ‘bets’ or ‘proprietary,’ allegations of a few trades over a multi-year period do not come close to supporting plaintiffs’ claim that the entire CIO – which managed hundreds of billions of dollars in assets for JPMorgan – functioned as a secret ‘high-risk trading desk’ between 2010 and 2012,” the bank asserted. “Try as plaintiffs might to lengthen the putative class period by challenging all of JPMorgan’s quarterly SEC filings dating back to February 2010, this case is really about statements made in April 2012.” And there’s no evidence, according to JPMorgan’s filings in the class action, that Dimon or Braunstein deliberately deceived shareholders in those comments.
If the SEC had extracted admissions that JPMorgan officials knowingly promulgated false statements or even that JPMorgan committed disclosure violations in SEC filings in 2010 or 2011, shareholder lawyers would be in a distinctly better position when they appear next Thursday before U.S. District Judge George Daniels of Manhattan to argue that their case should not be dismissed. But JPMorgan made no such concessions in its settlement with the SEC.
Instead, the bank admitted only to making inaccurate statements in documents it filed with the SEC on April 13, 2012, and on May 10, 2012, in violation of Section 13 of the Exchange Act of 1934. There’s no admission about filings before the first quarter of 2012, so shareholders get no boost in their arguments for a longer class period. And Section 13 says nothing about the state of mind of the officials who certified the inaccurate statements. A Section 13 admission does not help shareholders prove that JPMorgan engaged in securities fraud.
In fact, the SEC settlement can arguably be read to support JPMorgan’s contention in the class action that Dimon and Braunstein didn’t knowingly mislead investors in April 2012. The consent order is full of juicy details about what the bank did to investigate the CIO in April and early May, including the failure of senior officials to keep the audit committee informed. The pre-2012 failure to detect CIO losses, however, arguably suggests that Dimon and Braunstein were insufficiently informed – rather than deceptive – when they spoke to analysts that April.
Obviously, shareholder lawyers are going to do their best to trumpet JPMorgan’s admissions when Judge Daniels hears arguments next week on the bank’s motion to dismiss their class action. And obviously, JPMorgan would rather that it didn’t have to concede that it violated securities laws. My point is simply that the bank’s admissions won’t materially change the arguments either side can make at the class action hearing. JPMorgan’s SEC admission will in all likelihood not mean billions of dollars in increased exposure to shareholders.
Doomsday, in other words, has not yet arrived for defendants facing parallel SEC and private shareholder claims. Unless Judge Daniels proves me to be way off the mark, JPMorgan has shown that it’s possible to give the SEC an admission that will permit the agency to look tough without conceding much, if anything, in private litigation. Every case is different, of course, but Section 13 could be turn out to be a popular exit strategy for defendants.