It is being said that the “London Whale” is the gift that keeps giving for regulators. Former London-based JPMorgan trader Bruno Iksil, whose team is thought to be responsible for the complex derivatives bet, was nicknamed the “London Whale” due to the massive trading position. JPMorgan Chase & Co has now agreed to pay the latest in a string of fines for the disastrous trades. Joe Evangelisti, a spokesman for JPMorgan, said the bank neither admitted nor denied the U.S. Commodity Futures Trading Commission’s (CFTC) legal conclusion that there was a violation, while admitting to “certain facts set out in the order.”
As we have come to expect, that’s a typical response by a corporate wrongdoer. According to the CFTC, JPMorgan Chase agreed to settle by paying $100 million and admitting its traders acted recklessly. The bank was instructed to send the funds to accounts receivable at the CFTC’s division of enforcement. The settlement comes about one month after JP Morgan Chase paid $920 million to four other U.S. and British regulators to resolve probes of the bank’s $6.2 billion in derivative losses involving its chief investment office.
The Justice Department, even after filing criminal charges against two former JPMorgan traders who allegedly helped conceal the losses, is still investigating and will decide whether to bring further action against the bank. The settlement with the CFTC comes as JPMorgan continues to deal with regulators and U.S. authorities on a number of fronts. The bank is in the middle of attempting to negotiate a global settlement with federal prosecutors for its role in the packaging and selling of faulty mortgage-backed securities that could result in a potential $11 billion settlement. JPMorgan announced last month that it has set aside up to $23 billion in reserves to pay for all its potential legal bills to come.
The CFTC charged JPMorgan with violating a prohibition on manipulative conduct when it traded in credit default swaps. By selling a huge volume of “swaps” in a concentrated period, the bank’s traders “recklessly disregarded” the principle that legitimate market forces should set prices, according to CFTC officials. According to the CFTC the bank admitted that “JPMorgan traders acted recklessly with respect to this fundamental precept by employing an aggressive trading strategy.” JPMorgan’s traders tried to defend their position in credit derivatives “by dumping a gargantuan, record-setting, volume of swaps virtually all at once, recklessly ignoring the obvious dangers to legitimate pricing forces,” according to David Meister, the CFTC’s head of enforcement. The bank admitted to the charge that led to that statement. The reckless conduct occurred on one day, Feb. 29, 2012, according to the settlement agreement.
By charging the bank with “employing a manipulative device,” the CFTC relied on new powers granted it by the 2010 Dodd-Frank financial regulatory overhaul. The agency previously had to prove a defendant intended to engage in manipulative conduct, a bar so high that the commission was able to bring few cases under it. The new authority, introduced by Democratic Senator Maria Cantwell, allows the CFTC to rely on evidence of “reckless” misconduct rather than any specific intent. While discussing the new authority under Dodd Frank, Sen. Cantwell said in a media interview that the CFTC case against JPMorgan “is exactly what we’re looking for.” Sen. Cantwell also said, “It really does create a bright line in the marketplace.”
According to the CFTC charges, a JPMorgan portfolio in credit default indices with a net value of more than $51 billion started to plummet in January 2012. In February, as daily losses were large and growing, traders were trying to reduce their mark-to-market losses. The chief investment office of JPMorgan had a $65 billion short position on one index, CDX NA.IG9 10 year index, and on Feb. 29, the bank sold $7 billion in a protective effort. The sales substantially dropped the market price of the index and improved the book value of JPMorgan’s position, according to the CFTC. Two former JPMorgan employees have already been criminally charged with trying to hide some of the losses by deliberately giving inaccurate values to the securities involved in the trades.
 Virginia Harrison, JPMorgan to pay fresh $100M London Whale fine, available at: http://money.cnn.com/2013/10/16/news/companies/jpmorgan-whale-settlement/
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