Because JPMorgan is expected to admit that its own lax controls made it possible for traders to build up risky positions and cover up their losses without detection, the S.E.C. is likely to tout the settlement as part of a new get-tough approach to Wall Street. An admission of wrongdoing would certainly be a step in the right direction, departing from the longstanding practice of banks settling with the S.E.C. without admitting or denying liability, and staining JPMorgan’s reputation as a bank that excels at managing risk. The bank would surely suffer from such an outcome—not only monetarily but in the form of strained relations with regulators and clients.
When it comes to holding individuals accountable, however, the deal falls short. Senior executives are expected to avoid charges in the case, according to the Times. This comes even as observers have raised questions about whether executives failed to supervise the Whale trades or inform the public about them afterward. “Because the settlement doesn’t cite any individuals, no one has to take ownership of the problem, and the settlement doesn’t really send a message to future actors about their responsibility for monitoring and managing the risk of misconduct,” Jill E. Fisch, a professor at the University of Pennsylvania Law School, told me.
If the settlement fails to identify any high-ranking executives at the bank as responsible for the actions leading to such a massive fine, the S.E.C. will be supporting the bank’s own narrative about the Whale missteps. An internal report, released by the bank in January, said that a small group of managers in its Chief Investment Office held most of the responsibility for flaws that allowed the losses to occur. The report said that senior managers, including Jamie Dimon, the C.E.O., also bore responsibility, but that “direct and principal” responsibility for the losses belonged to the traders involved.
People in the finance world have been preoccupied for decades with whether—and how—executives should be held responsible for the fraudulent behavior of people who report to them. One of the best-known case studies comes from the near-collapse of the investment bank Salomon Brothers, in 1991, when Paul Mozer, a trader, placed fraudulent bids in a U.S. Treasury securities auction in the name of clients who were unaware of the fraud. When government regulators questioned his actions, Mozer went to his supervisor, John Meriwether, who in turn reported the incident to the Salomon C.E.O., John Gutfreund, but did nothing further. Gutfreund also did nothing. Months later, Gutfreund had to resign, and the firm almost collapsed, when the press caught wind of the investigation and of Salomon’s failure to take action.
Since then, financial executives, lawyers, regulators, and business ethicists have debated whether Meriwether should have been held accountable for Mozer’s misdeeds or the firm’s failure to come clean to the S.E.C.
Tom Donaldson, a professor at the University of Pennsylvania’s Wharton School of Business, who served from 2005 to 2010 on the National Adjudicatory Council of the Financial Industry Regulatory Authority (FINRA), an independent securities regulator that works closely with the S.E.C., told me that, since the nineteen-nineties, FINRA and the S.E.C. have looked for ways to hold supervisors accountable for crimes committed by those who report to them, incorporating what Donaldson called the “Meriwether principle.”
For Donaldson, the JPMorgan settlement represents a missed opportunity to apply the Meriwether principle: “Notice that this proposed settlement sidesteps blaming specific individuals responsible for the alleged failure of ‘institutional controls,’ ” he said.
To be sure, JPMorgan could face more financial punishment ahead. The settlement comes as the bank faces a shareholder lawsuit by a group of institutional investors. Jeffrey W. Golan, a partner at Barrack, Rodos & Bacine, a law firm that specializes in securities class-action suits on behalf of institutional investors (but that isn’t involved in the JPMorgan lawsuit), said that plaintiffs in the JPMorgan case appear to have an “incredibly convincing case,” and that, if they prevail, the damages could be “in the billions of dollars,” based on the difference between the stock price at the time the bank allegedly misrepresented the magnitude of the losses and the price drop after the facts of the Whale incident emerged.
Why would JPMorgan’s board of directors agree to pay such a large fine to protect senior bank officials when the bill for the Whale trade—which happened under their watch—keeps getting larger? Dimon has enjoyed a seemingly limitless abundance of good will with the board for bringing JPMorgan through the financial crisis in much stronger shape than most other banks. However, add the eight-hundred-million-dollar fine to the initial six-billion-dollar trading loss, and factor in billions of dollars that could result from pending civil claims, and one has to wonder whether the bank’s shareholders would be better served by cutting ties with top management rather than by paying massive fines to protect them. The board, after all, owes its allegiance to shareholders, not to the bank’s managers.
Reflecting on the board’s decision to support top managers despite it all, Golan told me, “It’s like a Greek tragedy—whom do you sacrifice at the end?” But the difference between Greek tragedy and the JPMorgan case is that, for the Greeks, fate determined who got sacrificed, whereas here the power is concentrated in the hands of a bunch of regulators and the eleven members of JPMorgan’s board.
Original Article
Source: newyorker.com
Author: Michael A. Santoro
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