JP Morgan Fined US$920m for ‘London Whale’ Episode

JP Morgan has agreed to pay about US$920m in penalties to US and UK regulators over the “unsafe and unsound practices” that led to trading losses of US$6.2bn incurred by rogue trader Bruno Iksil last year in what was dubbed the
‘London Whale’ episode
.

North America’s  biggest bank will pay US$300m to the US Office of the Comptroller of the Currency (OCC), US$200m to Federal Reserve, $200m to the Securities and Exchange Commission (SEC) and £137.6m ($219.74m) to the UK’s Financial Conduct Authority.

JP Morgan admitted wrongdoing as part of the settlement, an unusual step for a finance firm in the crosshairs of multiple legal actions.

“JP Morgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses,” said George Canellos, co-director of the SEC’s division of enforcement.

“While grappling with how to fix its internal control breakdowns, JP Morgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company’s problems and determine whether accurate and reliable information was being disclosed to investors and regulators.”

In a statement the OCC blamed “unsafe and unsound practices related to derivatives trading activities conducted on behalf of the bank by the chief investment office (CIO)”, for the fine.

The OCC said its inquiries had found inadequate oversight and governance to protect the bank from material risk, inadequate risk management, inadequate control over pricing of trades, inadequate development and implementation of models used by the bank, and inadequate internal audit processes.

The bank also faces another fine from the Commodity Futures Trading Commission (CFTC), which is still investigating whether the bank is guilty of market manipulation.

In a statement, JP Morgan’s chairman and chief executive (CEO), Jamie Dimon said: “We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them. Since these losses occurred, we have made numerous changes that have made us a stronger, smarter, better company.”

A toxic cocktail

Commenting on the fine, Andre Spicer, professor of organisational behaviour at London’s Cass Business School, said: “The London Whale affair was the product of a toxic cocktail of complex products, confused systems, a weak risk function and overwhelming pressure to deliver results. It was not due to bad individuals, it was due to a bad system. Addressing these root causes will require large banks to simplify their business, improve the quality of their risk monitoring systems, and make the compliance function an integral part of the business.

“The CEO of JP Morgan has indicated the bank has already started this process. But simply investing in more systems and risk officers is unlikely to be enough.  Other action needs to be taken to avoid such costly mistakes in the future. The bank needs to develop a culture which is more concerned with prudence than excessive risk taking. It is also vital that when staff see something going wrong they have the space to speak out.”

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