Invoking a powerful new provision of the Dodd-Frank Act that bars reckless manipulative conduct, the Commodity Futures Trading Commission today announced it reached a $100 million settlement with JPMorgan Chase Bank over massive trading losses by the so-called London Whale.
The settlement, which comes at a time when most of the agency is closed due to the government shutdown, includes a narrowly tailored admission of wrongdoing from the mega-bank, which last week revealed it has set aside $23 billion to cover ongoing legal costs.
Last month, JPMorgan paid $920 million to settle charges brought by the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve and U.K. Financial Conduct Authority stemming from the same London trades involving credit default swaps.
In February 2012, the London-based trader, desperate to avoid further losses, sold an enormous volume of certain credit default swaps in a day. The bank “recklessly disregarded the fundamental precept on which market participants rely, that prices are established based on legitimate forces of supply and demand,” according to the CFTC. The bank lost $6.2 billion on the trades.
“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,” David Meister, the CFTC’s director of enforcement, said in a statement. (Meister, a former partner at Skadden, Arps, Slate, Meagher & Flom recently announced he plans to leave the agency this month.)
The Commodity Futures Trading Commission charged JPMorgan with violating Section 6(c)(1) of the Commodity Exchange Act and the agency’s Rule 180.1 under the Dodd-Frank Act. A JPMorgan spokeswoman did not immediately respond to a request for comment.
The bank still faces an ongoing probe—by the U.S. Attorney’s Office in Sacramento—and a suit by the Federal Housing Finance Agency in Manhattan federal court stemming from the sale of mortgage backed securities. Settlement demands in those cases could top $10 billion.
The CFTC settlement sheds light on the agency’s new business conduct rules applicable to swap dealers, including those that impose supervision and control obligations.
JPMorgan didn’t register as a swap dealer with the CFTC until December 2012—10 months after the trades took place. But according to the CFTC, “had the regulations been in place, much of the offending conduct at issue (and the significant losses it caused) may well have been detected and remedied internally much more quickly, thereby potentially reducing losses.”
Commodity agency Commissioner Scott O’Malia, a Republican, dissented from the settlement, writing that the CFTC “should have taken more time to investigate whether the company is liable for a more serious violation, namely price manipulation.”
O’Malia also argued that since the “manipulative device" charge has not been tested before, the case should have gone to trial. “I strongly believe that the courts must decide this case of first impression in order to set precedent and to guide both the Commission and market participants,” he wrote.
Commissioner Bart Chilton issued a concurring statement backing the settlement, calling the penalty “an appropriate amount for the egregious manipulative conduct.” He continued: “Our Division of Enforcement has done an exemplary job on this case. Doing so under normal circumstances is challenging, but concluding this matter during the government shutdown is extraordinary.”
Chilton, a Democrat, also pointed out that the day before the government shutdown, the CFTC returned $1 billion to the U.S. Treasury from fines and settlements.
“The following day, boom boom out went the lights at the CFTC. Markets aren't being watched by the Agency, and only the most limited of functions are being carried out,” he wrote. “The matter today is a significant exception.”