JPMorgan Chase & Co. (JPM) is poised to pay about $900 million to settle U.S. and U.K. claims that lax internal controls led the bank to provide inaccurate information about last year’s record trading loss to the board, investors and regulators, people with knowledge of the matter said.
The bank is set to announce deals today with four regulators over its handling of the trades by an employee known as the London Whale because his bets were so large, the people said, requesting anonymity because talks were private. Separately, the firm may also pay less than $80 million to settle two watchdogs’ probes tied to consumer lending practices, two people said.
Chief Executive Officer Jamie Dimon, whose pay was cut in half last year after the board said he was partially responsible for faulty oversight of the trades, told employees in a Sept. 17 memo the bank is making an “unprecedented effort” to simplify its business, overhaul controls and improve relations with regulators. The firm has been beset by inquiries this year, including the emergence last month of an investigation into its hiring practices in Asia as well as criminal probes tied to mortgage-bond sales and energy trading.
The package of penalties to be announced today is a message to banks “that regulators are going to really ratchet up the fines if the organization is deemed too big to manage in order to get the organization to simplify their structure,” said Charles Peabody, an analyst at Portales Partners LLC in New York.
The Office of the Comptroller of the Currency is imposing about $300 million in penalties, while the U.S. Securities and Exchange Commission, Federal Reserve and the U.K.’s Financial Conduct Authority each levy about $200 million in sanctions, one of the people said.
JPMorgan lost more than $6.2 billion last year on the errant bets placed by Bruno Iksil, the so-called London Whale. The bank disclosed the souring trades in May 2012, weeks after Dimon called initial press reports on the positions a “tempest in a teapot.” The firm was forced to restate earnings results, and its market value fell by almost $51 billion before recovering.
Iksil’s former boss, Javier Martin-Artajo, and junior trader Julien Grout were indicted Sept. 16 on five charges each, including securities fraud and conspiracy, for allegedly seeking to hide initial losses. The men are in Europe and have yet to appear in U.S. court. Prosecutors have said Iksil, who wasn’t charged, is cooperating with the case. An attorney for Grout said this week that his client relied on Iksil’s expertise and will be found innocent.
“This is the financial blunder of the decade,” said John Coffee, a securities law professor at Columbia University in New York. “We have mainly negligence, slow response and some confused self-protective statements made by senior people at JPMorgan,” though they were allegedly deceived, he said.
The U.S. Senate Permanent Subcommittee on Investigations accused JPMorgan in a 301-page report of misinforming investors and regulators. The panel’s chairman, Michigan Democrat Carl Levin, referred its findings to the SEC and Department of Justice in April.
Today’s settlements won’t close investigations of the trades by the Justice Department, Commodity Futures Trading Commission and state attorneys general, people familiar with the matter said this week. The CFTC has been investigating whether the bank manipulated trading in credit derivatives while the U.S. Attorney’s Office in Manhattan, which is part of the Justice Department, is conducting a criminal probe.
“The settlement will not resolve the full extent of the bank’s liability and the consequences that could arise,” said Samuel Buell, a former prosecutor who now teaches law at Duke University Law School.
Spokesmen for New York-based JPMorgan, the OCC, CFTC, Justice Department and FCA declined to comment. Spokesmen for the SEC and Fed didn’t respond to messages after business hours.
The OCC and Consumer Financial Protection Bureau have been investigating JPMorgan’s credit-card debt collection practices as well as its sales of identity-theft products, people said last week. They also are poised to announce accords with the bank today, two people said.
The bank is seeking to settle as many inquiries as possible before the third quarter ends Sept. 30, the people said. Chief Financial Officer Marianne Lake told investors last week that the quarter’s addition to legal reserves would “more than offset” about $1.5 billion of consumer reserve releases.
Former Chief Investment Officer Ina Drew and her head of the international chief investment office, Achilles Macris, were among the top executives who left the bank after the trading debacle, along with Chief Financial Officer Douglas Braunstein. JPMorgan clawed back more than $100 million in pay from Drew and other managers involved in the bets.
The Federal Bureau of Investigation and SEC have been scrutinizing public statements, calls with investors and an April 2012 earnings presentation by Dimon and Braunstein, Bloomberg News reported in June, citing five people with knowledge of the probes.
While the OCC and Fed censured JPMorgan this year and ordered it to strengthen internal controls, the regulators didn’t assess fines at the time.