RPT-WRAPUP 1-Scandals cost JPMorgan $1 billion in fines

Fri Sep 20, 2013 2:40pm BST

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By David Henry and Emily Flitter

Sept 19 (Reuters) - It's $1 billion in payouts that JPMorgan Chase & Co most likely wants to forget.

In agreements with regulators totaling $1 billion and made public on Thursday, the nation's biggest bank settled four civil investigations into its "London Whale" trading scandal and two more into the wrongful billing of credit-card customers.

The deals, which involve five authorities from the United States and one from the UK, are a milestone in the company's push to clean up its legal affairs but leave JPMorgan exposed to additional costs and embarrassment.

The bank still faces criminal probes into the trading scandal, its conduct during an energy trading investigation, sales of mortgage securities in the United States and possible bribery in China. Investigators are also looking into its role in setting benchmark interest rates known as LIBOR.

The settlements include $920 million of penalties for JPMorgan's London Whale trading scandal, which Chief Executive Jamie Dimon at first dismissed as a "tempest in a teapot" and ultimately resulted in $6.2 billion in losses. The deals included an admission of wrongdoing, which has been rare in past settlements made by the U.S. Securities and Exchange Commission.

A second set of settlements includes $80 million of payments for billing of credit-card customers for indentity-theft protection services that they did not receive. The deals, made with the U.S. Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau, come after the company issued $309 million of refunds to customers.

The Comptroller of the Currency also on Thursday ordered JPMorgan to improve its consumer debt-collection practices. That order did not include financial penalties and involved allegations made public more than two years ago.

The London Whale deals, reached with the UK's Financial Conduct Authority and the U.S. Federal Reserve, SEC and Comptroller of the Currency, resolve the biggest civil probes into the trading debacle. The deals include citations against JPMorgan for poor risk controls and failure to inform regulators about deficiencies in risk management identified by bank management.

The scandal took on the London Whale nickname that hedge funds had given to Bruno Iksil, a trader at JPMorgan's Chief Investment Office in London, for the enormous size of the positions he took for the company.

ADMITTING THE FACTS

By coordinating the announcements, the regulators delivered a round $1 billion punishment in a single day. Regulators have been criticized by lawmakers and the public for not bringing more cases or sending Wall Street executives to jail for financial crisis-era misdeeds.

The deal follows a decision by the SEC to allow fewer firms to settle without admitting or denying the facts of cases. In August, the SEC reached a settlement with hedge fund manager Philip Falcone, its first big case to include an admission of wrongdoing.

But George Canellos, co-director of the SEC's enforcement division, cautioned in a statement that officials will not demand admissions in all future settlements.

Dimon and other JPMorgan executives had already admitted mistakes in the Whale debacle. Starting the day Dimon disclosed in May 2012 that the Whale trades were losing billions of dollars, he has apologized for the "tempest in a teapot" remark. He also testified before Congress that bank was "stupid" in handling the trades at its Chief Investment Office.

The enforcement actions left some people dissatisfied because they did not blame any individuals specifically for wrongdoing.

Senator Carl Levin, a Michigan Democrat and chairman of the Senate Permanent Subcommittee on Investigations, issued a statement pointing out that his panel had found that "senior bank executives made a series of inaccurate statements." He said there is still time for other civil and criminal investigations to hold people accountable.

David Weinstein, a former federal prosecutor who is now a partner at Clarke Silverglate in Miami, said, "Somebody else has to answer for this conduct rather than just paying money."

Dimon has said that JPMorgan executives did not intend to mislead anyone about the Whale losses, which the bank concluded were initially understated by its traders. Two traders have been indicted on conspiracy and fraud charges and Iksil has agreed to cooperate with prosecutors.

Dimon, in a statement issued by the company on Thursday, said, "We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them."

In April, Dimon told shareholders that fixing risk controls had become bank's top priority and that some projects aimed at building the company's business had been put aside.

JPMorgan called the Whale settlements "a major step in the firm's ongoing efforts to put these issues behind it."

But the deals leave unresolved other issues that have helped drive the bank's legal costs to $5 billion a year.

The company continues to face a criminal probe by U.S. prosecutors into the London Whale scandal, despite Dimon's public insistence that no bank executives intentionally misled investors.

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 in the London Whale debacle.

The state of Massachusetts is also investigating, the bank said. And, despite the Comptroller of the Currency's order on debt collections, a group of 13 states is investigating those practices.

"You are seeing the regulators ratchet up the heat on the banks," said analyst Charles Peabody of Portales Partners. "If you are too big to manage, they are going to make you pay."

The bank has been under intense scrutiny from the U.S. government since May 2012, when Dimon disclosed the mounting loss.

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 and step up its anti-money launder safeguards.

The total penalties, which are among the highest ever paid by a bank, are well short of the $1.92 billion that London-based HSBC agreed to pay last year to settle money laundering charges.

Fines are determined by laws governing the amount each agency can impose for each violation of a rule, and then are fine-tuned through negotiations between the regulators and the bank.

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