By David Henry and Emily Flitter
REUTERS - The "London Whale" trading scandal, once dismissed as a "tempest in a teapot" by JPMorgan Chase & Co
Settlements with four U.S. and British regulators, made public on Thursday, resolve the biggest civil probes of the bank's $6.2 billion of Whale derivatives trading losses last year. Criminal investigations are still under way.
The bank called the settlements, "a major step in the firm's ongoing efforts to put these issues behind it." It was cited for poor risk controls and failure to inform regulators about deficiencies in risk management that it knew about.
But the deals, hard fought in the case of the U.S. Securities and Exchange Commission, which narrowly approved its settlement with a split vote, do not clear up the legal problems some individuals at the bank might face as the SEC continues its investigation. They also leave unresolved other issues that have helped drive the bank's legal costs to $5 billion a year and undermined Dimon's hold on his job, as well as his influence on the banking industry and its regulation.
Reaction to the settlements in Washington appeared mixed, with lawmakers responsible for financial oversight expressing a range views about whether enough had been done to hold JPMorgan accountable for the Whale scandal.
JPMorgan's board recently changed its rules to give more power to directors other than Dimon after some shareholders cited the risk-control problems to argue that Dimon should not be both board chairman and chief executive.
The company continues to face a criminal probe by U.S. prosecutors into the derivatives debacle, despite Dimon's public insistence that no bank executives intentionally misled investors.
But a person familiar with the matter said the SEC is still investigating individuals and they are not considered lower-level people.
"The whole issue of misinforming investors and the public is conspicuously absent from the SEC findings and settlement," said Senator Carl Levin, a Michigan Democrat who chairs the Senate Permanent Subcommittee on Investigations (PSI).
"Our PSI investigation showed that senior bank executives made a series of inaccurate statements that misinformed investors and the public as the London Whale disaster unfolded. Other civil and criminal proceedings apart from this settlement are continuing, so there is still time to determine any accountability on that matter."
But Representative Maxine Waters, the ranking Democrat on the House Financial Services Committee, praised the settlements, saying they sent a "powerful message to Wall Street."
Even as JPMorgan was hailing the settlements, it said it had received a legal notice that the staff of another regulator, the U.S. Commodity Futures Trading Commission, intends to recommend an enforcement action against the bank for its derivatives trading.
The state of Massachusetts is also investigating, the bank said.
"This certainly isn't a closure on the Whale," said analyst Charles Peabody of Portales Partners.
THE WHALE BRUNO
Bruno Iksil, the trader whose big bets earned him the nickname London Whale, has signed a cooperation agreement with prosecutors and has not been charged with any wrongdoing. Two other traders who worked with Iksil in London, Javier Martin-Artajo and Julien Grout, have been criminally charged by U.S. prosecutors over their role in the scandal, accused of trying to hide the mounting losses.
The penalties announced Thursday include $300 million to be paid to the U.S. Office of the Comptroller of the Currency, $200 million to the Federal Reserve, $200 million to the U.S. Securities and Exchange Commission and 137.6 million pounds to the UK's Financial Conduct Authority.
The total penalty is one of the highest ever paid by a bank, but is well short of the $1.92 billion that London-based HSBC Holdings Plc
Penalties are determined by laws governing the amount each agency can charge in penalties for each violation of a rule, then are fine-tuned through negotiations between the regulators and the bank.
Dimon said in a statement issued by the company: "We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them."
George Canellos, co-director of the SEC's enforcement division, said in statement: "At its core, today's case is about transparency and accountability, and JPMorgan's admissions are a key component in that message."
Canellos said the bank admitted 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."
Michael Piwowar, the newest Republican member of the U.S. Securities and Exchange Commission, voted against approving the JP Morgan settlement in a split 2-1 vote, according to people familiar the matter.
In the closed-door meeting last week, Piwowar said he was concerned that the SEC was fining the company, which could hurt shareholders, rather than taking action against top executives at the bank, one of those people said.
Mary Jo White, who currently chairs the SEC, and Republican Commissioner Daniel Gallagher, whose prior employers did legal work for the bank, were recused from voting on JPMorgan.
While the SEC has said it is continuing its Whale investigation, a JPMorgan spokesman said SEC staff told the bank it did not anticipate bringing any action against Dimon.
JPMorgan also faces other investigations that include possible bribery in hiring practices in China and potentially fraudulent sales of mortgage securities.
"You are seeing the regulators ratchet up the heat on the banks," said Portales Partners' Peabody. "If you are too big to manage, they are going to make you pay."
JPMorgan shares closed down 1.2 percent at $52.75 on the New York Stock Exchange.
The bank has been under intense scrutiny from the U.S. government since May 2012, when Dimon disclosed the firm was losing billions of dollars on derivatives deals that had been questioned a month earlier in news reports.
Dimon initially criticized those reports as a "tempest in a teapot." He has repeatedly apologized for that remark and said the bank was "stupid" in handling the trades from a London desk of the bank's Chief Investment Office.
While Dimon is not cited by name in the SEC's administrative order, the regulatory filing notes he is included in its references to "senior management." It does not, however, point blame at any single top executive.
The criminal investigations are focusing on whether people inside the bank had more detailed knowledge about the potential losses than the bank acknowledged in its early public statements, sources familiar with the probe have told Reuters.
Thursday's civil penalties follow orders in January from the Office of the Comptroller of the Currency and the Federal Reserve directing JPMorgan to improve its risk control systems.
In April, Dimon said in a letter to shareholders that fixing risk controls was the bank's top priority, and that some projects aimed at building the company's business would have to be put aside.
The settlement announcements reveal some new details about the scandal, which has been the subject of congressional hearings.
For example, the Chief Investment Office's own assessment of the value of its credit derivatives made other bank officials so uncomfortable that one unnamed senior investment banking executive consulted an outside lawyer before signing documents that would go in the company's public financial reports, according to the SEC's order.
But many of the settlement details came out previously in a congressional report on the trading scandal or in the criminal indictments against Martin-Artajo and Grout.
Also on Thursday, bank regulators ordered JPMorgan to improve its consumer debt-collection practices. The order, from the Comptroller of the Currency, does not include financial penalties. Some of the issues go back to allegations made public more than two years ago.
Despite the OCC order, JPMorgan still faces an investigation from a group of 13 states over its debt-collection practices.
(Reporting by David Henry and Emily Flitter in New York and Aruna Viswanatha and Sarah Lynch in Washington; Editing by Matthew Goldstein, John Wallace and Andre Grenon)