JPMorgan Chase (JPM) expects to be fined by authorities in the U.S. and U.K. over last year's $6.2 billion trading loss, which led to criminal charges against two former employees, said a person familiar with the matter.
The Securities and Exchange Commission signaled in a complaint filed yesterday against Javier Martin-Artajo, 49, and Julien Grout, 35, that the New York-based bank will be held accountable for providing inaccurate information to investors after the two men "fraudulently" mismarked their trades to conceal losses.
"JPMorgan failed to furnish to the commission, in accordance with the rules and regulations prescribed by the commission, such financial reports as the commission has prescribed," the SEC wrote in its complaint. SEC spokesman John Nester didn't return a call seeking comment.
The bank also expects to be fined by the Department of Justice, the Commodity Futures Trading Commission and the U.K.'s Financial Conduct Authority, said the person, who asked not to be named because the discussions are private.
JPMorgan Chief Executive Officer Jamie Dimon, 57, said in his April letter to shareholders that the bank was facing more sanctions related to the losses. Bruno Iksil, the Frenchman dubbed the "London Whale" because his trading portfolio grew so large, is cooperating with the U.S. government.
The bet on credit derivatives was "extremely embarrassing, opened us up to severe criticism, damaged our reputation and resulted in litigation and investigations that are still ongoing," Dimon said in the April letter. "We received regulatory orders requiring improved performance in multiple areas, including mortgage foreclosures, anti-money laundering procedures and others. Unfortunately, we expect we will have more of these."
The bank, which doesn't disclose how much it has set aside for legal expenses, said in a filing last week that it could face as much as $6.8 billion in legal losses beyond the reserve. The company's second-quarter litigation expense more than doubled to $678 million from a year earlier.
Litigation costs could total $3.8 billion in the second half of this year, estimates Charles Peabody, an analyst with Portales Partners in New York.
"Big banks may want to think twice about whether or not they will remain big" with all the added costs from regulatory probes and higher capital requirements, Peabody said in an interview. "There's a broader effort going on to force these big banks to dismantle. They are too big to manage, and litigation is one symptom of that."
JPMorgan violated securities rules that require companies to report accurate financial statements, among other infractions, the SEC said in its suit against the former traders. U.S. prosecutors charged Martin-Artajo and Grout, who worked with Iksil in JPMorgan's chief investment office in London, with conspiracy, wire fraud, making false filings and falsifying books and records.
Their "scheme" caused the bank to release inaccurate earnings information to investors in April and May 2012, the SEC said in its suit. In July 2012, JPMorgan restated first-quarter results after an internal investigation revealed that values on the derivatives portfolio weren't consistent with accounting rules. Attorneys for Martin-Artajo and Grout declined to comment.
When asked at a news conference yesterday about what penalties or accusations JPMorgan could face, Manhattan U.S. Attorney Preet Bharara declined to comment. Dennis Holden, a CFTC spokesman, said he couldn't immediately comment.
JPMorgan is negotiating a settlement with the SEC to end the regulator's yearlong probe of the bank's biggest trading loss ever, two people briefed on the talks said last week. The SEC may accuse the firm of failing to enact proper controls, supervise workers, escalate concerns and share information internally, one of the people said.
Former SEC Chairman Mary Schapiro said last year that her agency was looking into whether JPMorgan adequately disclosed the losses on a derivatives portfolio. An investigation by the Senate Permanent Subcommittee on Investigations, made public in March, also faulted the the bank's communications and securities filings as incomplete, inaccurate and misleading.