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.