Plenty of pundits have asked why regulators and law enforcement aren’t holding JP Morgan Chairman and CEO Jamie Dimon or his top lieutenants responsible for the bank’s “London Whale” trading loss. The “Whale” loss has attracted scrutiny from regulators at a civil and criminal level as well as shareholder lawsuits from six public pension funds. Two JP Morgan former employees were criminally indicted this week for hiding the “Whale” losses by allegedly intentionally mis-marking values for the trades, thereby driving false results to the bank’s first quarter 2012 financial statements. Much of the evidence for the criminal indictments comes from the so-called “Whale” himself in exchange for no prosecution and extensive testimony by bank executives, including Dimon and former CFO Doug Braunstein, before Senator Carl Levin’s investigative committee.
And yet Dimon and Braunstein are still coasting along on what I’ve called a “results reprieve” ever since the financial crisis of 2008. The bank’s earnings remain strong and the share price stays high in spite of the long list of legal and regulatory investigations and sanctions that’s getting longer every day. So Dimon keep his two jobs as CEO and Chairman. American Banker’s Editor in Chief Neil Weinberg recently listed some of the legal woes the bank is facing. Space precluded even the banking industry’s paper of record to list them all.
“Since 2009, regulators have cracked down on the bank over everything from derivatives sales to its mishandling of a giant trading loss to credit card debt collections… Separately, JPMorgan Chase agreed late last month to pay $410 million to settle charges that it deliberately misled public officials and rigged energy markets in California and the Midwest after the financial crisis… The past week also brought word that the bank is under federal criminal investigation for practices tied to sales of mortgage-backed bonds that the Justice Department has already concluded broke civil laws…. A probe by the OCC prompted the bank to quietly cease filing lawsuits to collect consumer debts in 2011, dismiss in-house attorneys and virtually shut down a collections machine that had been bringing in hundreds of millions of dollars a year. The bank has already said that it expects the OCC to take enforcement action in the matter. California Attorney General Kamala Harris also sued JPMorgan Chase in May over alleged shortfalls in its debt collection operations.
Another, possibly far more costly issue involves JPMorgan Chase’s massive asset management unit. The OCC privately warned JPMorgan Chase early last year that it had concluded the bank had wrongfully steered clients into in-house investment products.”
JP Morgan also recently reached a $546 million settlement with customers of failed broker-dealer MF Global. JP Morgan, and its auditor PwC, were fined in the UK for not safeguarding the bank’s own brokerage customer funds. JPM, like all the big banks, is being investigated for Libor rate manipulation and anti-money laundering violations, too. I wrote last November:
“JP Morgan is reportedly one of many subpoenaed by New York, Connecticut and Florida Attorneys General regarding Libor rate manipulation. JPM is also reportedly the subject of an OCC probe for suspicious money transfers. JPMorgan Chase, along with other big banks, will probably pay big money for its “get out of jail card”, as Barclays did for its Libor scandal and Standard Chartered did for its settlement for suspicious transactions with Iran.”
Finally, JP Morgan paid a big fine imposed by the Federal Energy Regulatory Commission for manipulating energy prices and the bank was implicated in the mortgage document robo-signing and fraudulent foreclosure scandals resulting in settlements with state attorneys general and the OCC/Fed.
Neil Weinberg goes on to ask the question out loud that we’ve all been asking ourselves for a while:
“The question JPMorgan Chase shareholders should be asking is whether management is doing enough to minimize the financial fallout of its regulatory and legal troubles. The bank paid more than $8.5 billion in related settlements between 2009 and 2012, representing almost 12% of the net income, Graham Fisher & Co. analyst Joshua Rosner estimated in March.”
There’s a strong case for holding Dimon, and former CFO Braunstein, accountable for the “Whale” losses and other financial crimes and sordid misdemeanors committed by the bank using Section 302 and 906 of the Sarbanes-Oxley Act of 2002. Those sections of the law cover false certifications by CEOs and CFOs of controls over financial reporting and disclosures included in quarterly and annual financial statements.
Even JP Morgan’s own Task Force report laid the blame on Dimon and Braunstein for $8 billion in losses attributed to the “Whale” trades.
“As the Firm’s Chief Financial Officer, Douglas Braunstein bears responsibility, in the Task Force’s view, for weaknesses in financial controls applicable to the Synthetic Credit Portfolio, as well as for the CIO Finance organization’s failure to have asked more questions or to have sought additional information about the evolution of the portfolio during the first quarter of 2012. This includes the failure by CIO Finance to have sufficiently questioned the size of the positions, the increase in RWA notwithstanding the RWA reduction mandate and the Synthetic Credit Portfolio’s profit-and-loss performance. And while the Task Force believes that the principal control missteps here were risk-related, the CIO Finance organization could have done more.
That they did not stems, in part, from too narrow a view of their responsibilities – i.e., a view that many of the issues related to the Synthetic Credit Portfolio were for the Risk organization and not for Finance to flag or address. The Task Force’s views regarding Firm Chief Executive Officer Jamie Dimon are consistent with the conclusions he himself has reached with respect to the Synthetic Credit Portfolio.”
Dimon is quoted in the report as saying:
“CIO, particularly the Synthetic Credit Portfolio, should have gotten more scrutiny from both senior management, and I include myself in that, and the Firm-wide Risk control function. . . . . Make sure that people on risk committees are always asking questions, sharing information, and that you have very, very granular limits when you’re taking risk. . . . . In the rest of the company we have those disciplines in place. We didn’t have it here.”
Back in July of 2012, many stories that marked Sarbanes-Oxley’s tenth anniversary focused on the dismal lack of prosecutions of CEOs and CFOs for false financial statement certification crimes after the financial crisis. Michael Rapoport in the Wall Street Journal describes what should have happened.
“As the Sarbanes-Oxley Act turns 10 years old, the law’s biggest hammer—the threat of jail time for corporate executives who knowingly certify inaccurate financial reports—is going largely unused.
After the financial crisis, the certification rules seemed like a strong weapon against executives suspected of misleading investors. But prosecutors haven’t brought any criminal cases for false certification related to the crisis. Regulators have brought only a handful of crisis-related civil allegations in that area.”
Dimon didn’t fire CFO Braunstein after the “Whale” revelations. The bank’s shareholders didn’t fire Dimon, or even strip him of at least his Chairman’s title at the most recent annual meeting. The Task Force report, however, says Dimon admitted that, “These were egregious mistakes. They were self-inflicted, we were accountable and what happened violates our own standards and principles by how we want to operate the company.”
It’s not unprecedented for a big bank board to kick its CEO to the curb. Vikram Pandit lost his job at Citigroup, but more for the bank’s wretched share performance than the legal and regulatory sanctions Citigroup shareholders have swallowed over the years. The same auditor, KPMG, continues to preside at Citi regardless of who is CEO or given that the US had to essentially nationalize the bank.
Regulators and law enforcement can act, if they’ve any inclination to do so. Dramatic action by regulators against a bank CEO for legal and regulatory failures happens more often outside the United States. It didn’t take long after the Libor scandal surfaced for UK regulators to tell the Barclays board that CEO Bob Diamond had to go. Oswald Grübel, the former UBS CEO, found it impossible to run UBS less than two weeks after his “rogue trader” was arrested for a $2.3 billion dollar loss. The bank’s reputation was already damaged by tax shelter scandals and UBS is also under pressure from regulators to shore up capital based on its experience during the 2008 crisis and these repeated risk management lapses. Grübel resigned and did not receive a severance package.
Société Générale CEO Daniel Bouton was forced out after losses caused by its “rogue” trader Jérôme Kerviel. Nomura CEO Kenichi Watanabe resigned under pressure from Japanese regulators investigating a series of insider trading scandals at the bank. The bank faces an investigation by the Japanese version of the SEC for poor controls over confidential client information.
If you’re wondering when it’s all going to end at JP Morgan, I’m still convinced it will end with Dimon leaving the bank. That’s whether or not Dimon and Braunstein are indicted for Sarbanes-Oxley Section 302 and 906 false financial statement certification violations. (Dimon for Fed Chairman, anyone?)
I predicted Dimon would be ousted in 2012 based on the MF Global problems. That didn’t happen. But each time JP Morgan racks up additional legal violations — and that seems to be accelerating — Dimon’s exit becomes more likely.