At JPMorgan, Trying to Do the Right Thing Isn’t Enough
Stephen Cutler, center, formerly the chief of enforcement for the S.E.C., is now on the receiving end of lectures from his successor.
Published: September 20, 2013
- As the Securities and Exchange Commission’s chief of enforcement from 2001 to 2005, the era of landmark fraud settlements with Enron, WorldCom and Tyco, Stephen Cutler earned a reputation as a tough and, at times, feared regulator. He was particularly dismayed by chief executives, chief financial officers, general counsels and compliance officials who, even if not directly implicated in wrongdong, created a culture in which it was ignored, tolerated, or even worse, tactily encouraged.
In a speech in 2004 to the General Counsel Roundtable, he said: “You’ve got to talk the talk; and you’ve got to walk the walk. Both are critical to maintaining a good tone at the top.” And he called for more accountability: “Hold all of your managers accountable for setting the right tone. That means disciplining or even firing them when they have failed to create a culture of compliance. Human nature being what it is, there will be those who break the rules. But if managers don’t do enough to prevent those violations, or let them go unaddressed for too long, then they should be held responsible — even in the absence of direct involvement in those violations.”
How times have changed.
As general counsel of JPMorgan Chase & Company, Mr. Cutler is now on the receiving end of the lectures, which this week came from George S. Canellos, a successor to Mr. Cutler and currently the co-chief of enforcement at the S.E.C. On Thursday, the S.E.C. and other regulators announced that JPMorgan had agreed to admit wrongdoing and pay nearly $1 billion in fines for its conduct in the “London Whale” matter, in which the bank’s chief investment office lost more than $6 billion and bank officials misled regulators about the losses. The S.E.C. faulted JPMorgan’s “egregious breakdowns in controls” and said that “senior management broke a cardinal rule of corporate management” by failing to alert the board to the full extent of the problem.
The S.E.C. didn’t name any of those senior managers, but made reference to the “chief executive,” who is Jamie Dimon. Mr. Cutler oversaw both the legal and compliance departments during those events. (Mr. Cutler no longer oversees compliance.)
And the London Whale affair isn’t JPMorgan’s only regulatory problem. The bank faces multiple other regulatory actions and investigations, ranging from manipulating energy markets, to mortgage-backed securities fraud, to failing to disclose suspicions about the Ponzi scheme operator Bernard Madoff, to conspiring to fix rates in the setting of the global benchmark interest rate informally known as Libor. As the allegations have mushroomed, JPMorgan has gone with almost dizzying speed from one of the world’s most admired banks to one tainted by scandal.
And all of this happened on Mr. Cutler’s watch. “You have to say, he didn’t run a tight enough ship,” said John C. Coffee Jr., a professor of law and expert in corporate governance at Columbia University. “It’s not just the London whale episode. I wouldn’t call that the crime of the century. But taken with everything else, the energy manipulation, the mortgage fraud cases, the Libor rigging, it suggests that there was not enough investment in compliance and the general counsel was not proactive enough. He’s done a very good job at defending the firm but not enough at preventing it in the first place.”
A lawyer whose company was an S.E.C. target during Mr. Cutler’s tenure said this week, “I have to admit to a certain amount of schadenfreude,” adding: “At the time, he did a lot of grandstanding about lawyers being gatekeepers and the moral compass for the organization and how we should have prevented all this. He sounded great on the soapbox. Now I’ve been following JPMorgan and it’s pretty ironic.”
This lawyer was among the many I contacted who didn’t want to be named. Indeed, I quickly realized that I was wasting my time trying to get people to offer unconflicted comments about Mr. Cutler or anyone else at the bank, since a) their firm represents JPMorgan; b) they represent someone for whom JPMorgan is paying the legal bills; or c) they’re trying to get into category a or b. James Cramer joked on CNBC’s “Mad Money” this week that JPMorgan should just buy the Manhattan law firm Paul, Weiss, Rifkind, Wharton & Garrison, famed for its high-stakes litigation practice.
Brad S. Karp, chairman of Paul, Weiss, worked with Mr. Cutler when he headed S.E.C. enforcement and has represented JPMorgan in various matters over the years. “JPMorgan is fortunate to have Steve lead its legal function during this period of unprecedented regulatory activity,” he said. “Steve is an extraordinary talent, with absolute integrity, an unwavering ethical compass and seasoned judgment. There is no better general counsel on Wall Street.”
Speaking on background, nearly all the lawyers I interviewed praised Mr. Cutler’s judgment, experience and legal skills. He remains a trusted adviser to Mr. Dimon. And the lawyers stressed that no one person, not even the general counsel or head of compliance, can prevent all wrongdoing in a company the size of JPMorgan. As the country’s largest bank, it is only to be expected that it’s going to have its share of regulatory and compliance issues, the lawyers said.
Still, Mr. Cutler acknowledged that the array of regulatory issues at JPMorgan had been “humbling.” When I visited him this week at his office at the bank’s Park Avenue headquarters, there was a surprising atmosphere of hushed calm given that the bank had announced the settlement and acknowledged wrongdoing that morning. He told me he hadn’t changed the view he articulated as enforcement chief. “You have to get the culture right,” he said. “It’s critical. That was true when I was at the S.E.C., and now I’ve seen it from the inside. I totally believe this. But I’ve discovered that it’s necessary but not sufficient.”
Institutions like JPMorgan, he said, and their senior managers can never lose sight of execution. “Just because you haven’t had any problems doesn’t mean you can stop testing and auditing. You have to trust but verify.” To that end, JPMorgan said this week that it would spend an additional $4 billion and commit as many as 5,000 employees to compliance and risk-management functions, including a new office of oversight and control. “We made mistakes,” Mr. Cutler acknowledged. “But we’ve spent a lot of time on self-reflection. What lessons can we learn? How can we do better? We’re trying to implement that.”
Donald Langevoort, a professor at Georgetown University School of Law who has written about compliance issues, said, “JPMorgan is throwing manpower at the problem, but whether a body count can be effective remains to be seen.” He said he knows Mr. Cutler, “and I have confidence in him, and I’m sure he did whatever he could.”
The problem, from his vantage point, is that Wall Street attracts risk-takers, which is how banks like JPMorgan make money. “JPMorgan is by no means unique,” he said. “None of these big banks really want compliance people causing traders and investment bankers to second-guess themselves too much because that gets in the way of making money. No one will say this, but it’s more effective to run the risk of noncompliance and pay a few fines, which is just a cost of doing business.”
Mr. Cutler disputed that: “I can’t tell you the number of times I’ve heard Jamie Dimon tell someone to do the right thing, and I don’t care what it costs.”
Mr. Cutler said that two of his “proudest days” as general counsel were May 10 of last year, when JPMorgan publicly disclosed the London Whale problem and acknowledged that it was the result of a badly conceived, executed and vetted trading strategy, and two months later, on July 13, when the bank told investors what had gone wrong and restated its first quarter results. “People and companies will inevitably make mistakes,” he said. “So the question is, how do you deal with it? We may not have been perfect, but we tried to get it right.”