Whistleblower in Deutsche Bank Case Says He Rejects $8 Million Award

Whistleblower in Deutsche Bank Case Says He Rejects $8 Million AwardAugust 19, 2016By Aruna Viswanatha WSJ

A whistleblower who is in line to receive $8 million for exposing alleged securities law violations at Deutsche Bank said that he is giving up the award because regulators only fined the company and didn’t go after the managers responsible.

A whistleblower who is in line to receive $8 million for exposing alleged securities law violations at Deutsche Bank AG said on Thursday that he is giving up his award because regulators only fined the company and didn’t go after the managers responsible for the misconduct.
“I will not join the looting of the very people I was hired to protect,” the whistleblower Eric Ben-Artzi said in an unusual op-ed in the Financial Times entitled “We must protect shareholders from executive wrongdoing.”
In May, the bank agreed to pay $55 million to settle U.S. Securities and Exchange Commission allegations that it hid paper losses of more than $1.5 billion during the financial crisis. The agency didn’t charge any executives in connection with the case.
A whistleblower at the time alleged the bank didn’t update the market value of certain credit default swap transactions, known as super senior trades. The whistleblower alleged the bank thus masked mounting losses as the market value sank.
In his op-ed, Mr. Ben-Artzi said he had been a risk officer at Deutsche Bank and one of three whistleblowers who reported the practice to the bank and to regulators. He wrote that he “just got word” from the SEC that he is to receive “half of a $16.5m whistleblower award.”
He said he was refusing it and asked that it “be given to Deutsche and its stakeholders, and the award money clawed back from the bonuses paid to the Deutsche executives.”
The SEC whistleblower program, put in place in 2011 as part of the Dodd-Frank financial-overhaul law, allows tipsters to collect between 10% and 30% of any penalties the government collects. The program is shrouded in secrecy, and the agency provides few details on the awards it grants other than the rough amount. It doesn’t identify the case in which any award was granted.
An SEC spokesman declined to comment on Mr. Ben-Artzi’s op-ed, citing the confidentiality requirements of the whistleblower law. SEC enforcement director Andrew Ceresney said of the Deutsche Bank case: “We brought all of the charges supported by the evidence and the law, which were unanimously approved by the Commission.” A Deutsche Bank spokeswoman declined to comment.
Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com

First Trader Convicted of Spoofing Gets 3-Year Prison Term – Bloomberg

July 13, 2016 — 12:05 PM EDT Updated on July 13, 2016 — 4:11 PM ED

Panther Energy Trading’s Coscia was charged under Dodd-Frank

Greed is only explanation for illegal trades, judge says
Michael Coscia, the first person convicted of spoofing after it was made a crime under the Dodd-Frank Act, was sentenced to less than half the prison time sought by federal prosecutors.

Coscia, 54, who had argued for probation, was sentenced Wednesday to three years in prison by U.S. District Judge Harry Leinenweber in Chicago. The only explanation for Coscia engaging in fraud while he was making $150,000 a month trading futures and had a net worth of $15 million was greed, the judge said.

“This is a serious crime with serious consequences,” Leinenweber said before handing down the sentence. He noted that spoofing has been going on for a long time.
Spoofing, which became illegal under the Dodd-Frank Act, carries a maximum of 10 years in prison. The practice typically consists of systematically placing orders without intending to execute them to trick the market into thinking there’s interest in buying or selling that doesn’t actually exist.

Coscia was convicted by a jury in November of manipulating futures markets by placing unusually large orders he didn’t intend to execute and then filling smaller trades on the opposite side. Prosecutors said it was a bait and switch scheme that yielded Coscia, the head of Panther Energy Trading LLC, more than $1 million over 2 1/2 months in 2011. The scheme resulted in losses to high frequency trading houses that were placing and executing orders at the same time.

Prosecutors had sought a term as long as seven years and three months. Coscia’s lawyers said sentencing guidelines allowed for a term of only four to 10 months. His three-year prison term is to be followed by two years of supervised release.
Coscia will appeal his conviction and ask to remain free on bond in the meantime, his lawyer said. If that request is denied, Coscia will have to surrender on Sept. 30.
Stephen Senderowitz, Coscia’s lawyer, told the judge his client had paid back $1.4 million gained through the trades at issue and cooperated with a Commodity Futures Trading Commission investigation. He also paid a $3 million fine in connection with the regulatory action against him.
‘Not an Ogre’
Senderowitz described Coscia as a devoted family man who is supporting and caring for his “gravely ill mother.”

“Michael Coscia is not an outlier,” he said. “He is not an ogre.”
Coscia’s sentencing follows a ruling Tuesday in a spoofing lawsuit brought by the Commodity Futures Trading Commission allowing a defendant to continue trading before a trial set for January. Igor Oystacher, of 3Red Trading LLC, was accused by the CFTC of continuing illegal trades even after it sued him.
A jury deliberated for one hour before finding Coscia guilty of six spoofing counts and six fraud counts. He was the first person tried under a provision of the 2010 Dodd-Frank Act that made it illegal to manipulate prices by placing orders without intending to execute them.
Renato Mariotti, who was a prosecutor in the case before leaving for private practice, said after the hearing that there was initially skepticism about whether the government could prove the charges.
“I think that skepticism is gone.” Mariotti said. “I think any trader who hears this sentence has to be thinking, ‘I don’t want to go to jail.”’
Testimony during the trial showed that Coscia, like many high-frequency traders, used an algorithm to place, cancel and execute orders. Coscia testified that he intended to execute all his orders at the time he placed them. He said he wasn’t aware of the provision of the Dodd-Frank Act and his lawyers argued in court filings that the law was unconstitutional.

Prosecutors presented trading data from the Chicago Mercantile Exchange and the ICE Futures Europe exchange showing that Coscia placed orders that were much larger than any others trading at the same time and also that he canceled those orders much more frequently.

Gold, Soybeans

During the trial, prosecutors focused on six transactions in the gold, euro, soybean meal, soybean oil, British pound, and copper futures markets. In total, these trades resulted in a profit of $1,070, according to testimony. Coscia conducted thousands of such trades, prosecutors told jurors.

U.S. Attorney Zachary Fardon in Chicago said after the hearing that it’s been suggested that such crimes are “murky” because of technology and the speed at which trading takes place. If there is harm to the market, the office’s Securities and Commodities Fraud Section will bring charges whether the conduct involved algorithmic trading in fractions of a second or manual trading, he said.
“It stands for the principle that if you commit fraud, we will find you and we will investigate you and punish you as appropriate,” Fardon said. “The key take-away is the government is not going to let technology get in the way.”
Three years is a substantial sentence for doing something that isn’t easily distinguished from every day cancellation of orders and will put high-frequency trading firms on alert, said Peter Henning, a law professor at Wayne State University’s Law School in Detroit.

“This should throw a scare into them,” Henning said. “They need to figure out where the line is between permissible trading strategies and spoofing.”
The case is U.S. v. Coscia, 14-cr-00551, U.S. District Court, Northern District of Illinois (Chicago).

JPMorgan Chase Chief Says ‘Banks Are Under Assault’

By NATHANIEL POPPER
JANUARY 14, 2015

As JPMorgan Chase reported sluggish earnings and potential new legal costs on Wednesday, its chief executive, Jamie Dimon, lashed out at regulators and analysts, including some who are calling for the breakup of what is the nation’s largest bank.

The bank announced that both its revenue and profit were down during the fourth quarter of 2014, with few bright spots across its many business lines.

The bank’s profits were also dragged down by $1 billion it put aside to deal with a government investigation of wrongdoing on its foreign currency trading desks. The bank has also begun preparing for new rules that are expected to be tougher on JPMorgan than any other financial firm.

During conference calls with reporters and analysts, Mr. Dimon sounded like a chief executive under siege.

“Banks are under assault,” Mr. Dimon said in the call with reporters. “In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

This is not the first time that Mr. Dimon has publicly criticized the new scrutiny and rules that banks have dealt with since the financial crisis. But in the past, Mr. Dimon was often confronting skeptics from outside the banking world. On Wednesday, he faced off against several industry analysts who questioned whether the costs associated with JPMorgan’s heft are outweighing the benefits.

“This is not Elizabeth Warren asking the questions,” said Mike Mayo, a bank analyst at CLSA, referring to the Massachusetts senator and outspoken critic of big banks. “Investors are talking about this.”

Mr. Dimon and Marianne Lake, JPMorgan’s chief financial officer, rebutted any suggestion that JPMorgan would need to be broken into smaller parts to be more valuable, and argued that the bank’s size gave it many advantages against competitors — “the model works from a business standpoint,” Mr. Dimon said.

But some of the analysts questioning Mr. Dimon and Ms. Lake did not seem to be satisfied by the answers and suggested that they expected to hear more about the bank’s efforts to change itself.

The company’s share price ended the day down 3.5 percent, at $56.81.

Mr. Mayo, who was one of the first analysts to call for the big banks to be broken up, pointed out on Wednesday that as JPMorgan had continued to grow it had actually become somewhat less efficient, as measured by the ratio between its expenses and revenue.

When the questions about the bank’s future kept coming on Wednesday morning, Mr. Dimon sounded increasingly frustrated with the analysts.

“This company has been a fortress company,” he said. “It has delivered to clients and its diversification is the reason why it’s had less volatility of earnings and was able to go through the crisis and never lost money ever, not one quarter.”

The bank’s fourth-quarter results, while disappointing, were not terrible for shareholders. The bank said its earnings fell 7 percent, to $4.9 billion, or $1.19 a share, from $5.6 billion, or $1.30 a share, in the period a year earlier. The results fell short of the $1.31 a share expected by analysts surveyed by Thomson Reuters.

Net revenue at the bank dropped 3 percent, to $22.5 billion, from the fourth quarter of 2013. On a so-called managed basis, revenue was $23.55 billion, slightly below the $23.6 billion anticipated by analysts.

For 2014 as a whole, JPMorgan reported profit of $21.8 billion, a 21 percent increase over 2013, and the highest ever annual profit for the company.

In the third quarter of 2014, JPMorgan’s Wall Street operations bolstered the results of the bank. But in the fourth quarter, the difficult trading conditions that have hurt profits at Wall Street firms over the last few years returned.

Revenue from JPMorgan’s once-lucrative fixed-income trading business fell 32 percent from the previous quarter and was down 23 percent from the period a year earlier. Much of the decline was because of businesses that JPMorgan had sold. But core trading was also down 14 percent.

“Banks are under assault,” Mr. Dimon said in the call with reporters. “In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

This is not the first time that Mr. Dimon has publicly criticized the new scrutiny and rules that banks have dealt with since the financial crisis. But in the past, Mr. Dimon was often confronting skeptics from outside the banking world. On Wednesday, he faced off against several industry analysts who questioned whether the costs associated with JPMorgan’s heft are outweighing the benefits.

“This is not Elizabeth Warren asking the questions,” said Mike Mayo, a bank analyst at CLSA, referring to the Massachusetts senator and outspoken critic of big banks. “Investors are talking about this.”

Mr. Dimon and Marianne Lake, JPMorgan’s chief financial officer, rebutted any suggestion that JPMorgan would need to be broken into smaller parts to be more valuable, and argued that the bank’s size gave it many advantages against competitors — “the model works from a business standpoint,” Mr. Dimon said.

But some of the analysts questioning Mr. Dimon and Ms. Lake did not seem to be satisfied by the answers and suggested that they expected to hear more about the bank’s efforts to change itself.

The company’s share price ended the day down 3.5 percent, at $56.81.

Mr. Mayo, who was one of the first analysts to call for the big banks to be broken up, pointed out on Wednesday that as JPMorgan had continued to grow it had actually become somewhat less efficient, as measured by the ratio between its expenses and revenue.

When the questions about the bank’s future kept coming on Wednesday morning, Mr. Dimon sounded increasingly frustrated with the analysts.

“This company has been a fortress company,” he said. “It has delivered to clients and its diversification is the reason why it’s had less volatility of earnings and was able to go through the crisis and never lost money ever, not one quarter.”

The bank’s fourth-quarter results, while disappointing, were not terrible for shareholders. The bank said its earnings fell 7 percent, to $4.9 billion, or $1.19 a share, from $5.6 billion, or $1.30 a share, in the period a year earlier. The results fell short of the $1.31 a share expected by analysts surveyed by Thomson Reuters.

Net revenue at the bank dropped 3 percent, to $22.5 billion, from the fourth quarter of 2013. On a so-called managed basis, revenue was $23.55 billion, slightly below the $23.6 billion anticipated by analysts.

For 2014 as a whole, JPMorgan reported profit of $21.8 billion, a 21 percent increase over 2013, and the highest ever annual profit for the company.

In the third quarter of 2014, JPMorgan’s Wall Street operations bolstered the results of the bank. But in the fourth quarter, the difficult trading conditions that have hurt profits at Wall Street firms over the last few years returned.

Revenue from JPMorgan’s once-lucrative fixed-income trading business fell 32 percent from the previous quarter and was down 23 percent from the period a year earlier. Much of the decline was because of businesses that JPMorgan had sold. But core trading was also down 14 percent.

JPMorgan’s enormous consumer bank also had a drop in revenue in several areas, including credit cards and mortgages, which has slowed down as the national housing market has cooled off.

The bank has been able to attribute some of its disappointing results in recent years to the enormous fines that it has had to pay for wrongdoing before and during the financial crisis.

But while those legal expenses were expected to eventually recede, they have kept coming. This quarter, JPMorgan set aside $1.1 billion — $990 million after taxes — to deal primarily with an industrywide investigation of manipulation in the foreign currency markets. It set aside a similar amount in the previous quarter, but the potential severity of the wrongdoing appears to have increased since then.

Mr. Dimon said that the bank was still bracing for more fines. “It’s going to cost us several billion dollars more somehow plus or minus another couple billion before we get to normal.”

Mr. Dimon said the bank took responsibility for some of the problems that have led to penalties, but he complained that it had been unfair when multiple regulators had come after the bank for the same issue.

The more enduring challenge for the bank, though, may be the new requirements that the bank maintain higher levels of capital than other banks because of its size.

A Federal Reserve official said in December that JPMorgan would most likely to have to raise over $20 billion of new capital, either by holding on to profits or selling more shares to investors. The bank is the only one that is expected to have to raise significant amounts of new capital.

A bank analyst at Goldman Sachs said this month that because of the price that JPMorgan was paying for its size, it may be worth less in its current form than it would be if it was broken apart. On Wednesday, multiple analysts said that regulators seemed to want JPMorgan to be smaller.

Mr. Dimon acknowledged that there could be a point when the additional costs could force it to spin off some businesses. “If the regulators at the end of the day want JPMorgan to be split up, then that’s what will have to happen,” he said. “We can’t fight the federal government if that’s their intent.”

But Mr. Dimon said that his team was confident that the bank would manage to comply with the rules as they have currently been outlined without any major changes. Invoking patriotism, he warned that if his company was forced to shrink, it could open the door for foreign competitors, especially those from China.

“America has been the leader in global capital markets for the last 50, 100 years,” he said. “I look at it as a matter of public policy. I wouldn’t want to see the next JPMorgan Chase be a Chinese company.”

After Crisis, Risk Officers Gain More Clout at Banks U.S. Banking Industry Bends to Pressure to Make Operations Safer and Simpler

 

ByJAMES STERNGOLD WSJ

June 25, 2014 10:38 p.m. ET

At Wells Fargo WFC +0.21%& Co., some executives pushed last year to relaunch a program letting homeowners get a line of credit secured by the equity in their house—and pay only the interest due on the loan. Such credit lines have been scarce since the financial crisis, but the executives saw them as a way to boost revenue as housing prices climb.

The bank’s chief risk officer, Michael Loughlin, said no. He proposed requiring regular payments that shrink the borrower’s debt over time and didn’t budge when told Wells Fargo might lose business to other lenders. The other bankers agreed to go along with his decision.

“Five years ago, if the risk group recommended against a strategy or product, it might just be one part of a debate,” he says. Now, “when we say no, it’s usually no.”

Mr. Loughlin is an example of the naysayers who are gaining power and multiplying in number across the U.S. banking industry as financial institutions bend to pressure from regulators to make their operations safer and simpler following the financial crisis that began in 2008.

The ultimate goal is to reduce the likelihood of another round of catastrophic losses that could shake the financial system. In a report released Wednesday, the Office of the Comptroller of the Currency warned that “credit risk is now building after a period of improving credit quality and problem loan cleanup.”

Wells Fargo now has 2,300 employees in its core risk-management department, up from 1,700 two years ago, and the department’s annual budget has doubled to $500 million in the same period. The company’s overall workforce has remained flat.

In February, Goldman Sachs Group Inc. GS +0.09% put its chief risk officer on the company’s management committee for the first time in Goldman’s 145-year history. The 34-person group oversees the entire firm and is traditionally dominated by executives who made their name as traders or investment bankers.

Regulators say they don’t track the total number of risk-management or risk-control employees at the nation’s roughly 6,700 banks, though officials believe that big and small institutions everywhere are turning jobs long seen as ho-hum into front-line commanders.

Senior risk officers earn as much as 40% more than they did a few years ago, says the OCC, a federal agency that regulates units of Bank of America Corp. BAC -0.13%, Citigroup Inc., C +0.02%J.P. Morgan Chase & Co. and about 1,700 smaller institutions.

The number of people who passed a risk-management exam often required for jobs in the field nearly tripled in the four years that ended last year compared with 2004 to 2007, according to the Global Association of Risk Professionals.

“These are the basic regulations and the norms now,” says Thomas Curry, head of the OCC.

The changes are hugely expensive amid sluggish loan growth and a steep decline in trading revenue. But banks have no choice. The OCC and Federal Reserve are using leverage they got through the Dodd-Frank financial-overhaul law and other postcrisis changes to restrain risk-taking.

Under rules issued in February, the biggest U.S. bank-holding companies are required to have a chief risk officer and a risk committee on the company’s board of directors. The chief risk officer must get direct access to the board committee and chief executive to make sure the risk officer’s opinions aren’t watered down or whitewashed. The companies have until 2016 to comply, but most have already made the changes.

In addition, large banks are being prodded to produce detailed statements specifying how much risk—and what kinds—the banks are willing to take to meet financial goals. Risk officers are being urged to investigate large losses and question bankers who make unusually big profits. Either one could be a sign of risk-taking run amok, regulators say.

“We look for patterns of behavior that reinforce a strong or weak risk-management culture both within and across lines of business,” says Martin Pfinsgraff, who is in charge of large-bank examinations at the OCC.

To keep a closer eye on banks, the Federal Reserve Bank of New York says it has about 45 examiners, about twice the precrisis level, who just assess risk management at each bank-holding company overseen by the regulator. Those companies include Goldman and Morgan Stanley. MS +0.62%

Regional bank KeyCorp, KEY +0.92%based in Cleveland, has rewritten its compensation guidelines so that loan officers can lose a chunk of their bonus if they fall short of new risk-management standards. Before the financial crisis, bonuses were determined largely by profit goals.

“Before, you threw something over the wall, and the risk managers said yes or no,” says William Hartmann, KeyCorp’s chief risk officer. “Now we’re more involved in the development of the strategy or the plan.”

Partly as a result, KeyCorp has sharply reduced its loan commitments for construction and real-estate development. Bankers there also work harder to judge the overall riskiness of a borrower, instead of one project at a time.

It is too soon to tell if any of the changes will make a difference in the long run. Regulators say banks still have a long way to go before complying fully with the toughened standards, known as “heightened expectations.”

Last year, none of the 21 largest banks subject to the requirements were deemed “strong” overall by the OCC in all categories. The number climbed to two earlier this year.

Another big challenge is the slippery nature of risk itself. Before the financial crisis, for example, many lenders believed they had properly weighed the dangers of subprime mortgages—and had set aside a financial cushion of reserves that was big enough to absorb losses on the loans. Those predictions were disastrously wrong.

“Our abilities to measure market risk are akin to where medicine was in the 1700s,” says Damian Handzy, chairman and chief executive of Investor Analytics, a New York firm that operates risk-control systems. “Everyone is honestly trying to get better at this, but we’re still in the laboratory. The old systems do not address systemic risk at all. Traditional banking tools are just not designed for that.”

Jeffrey Wallis, president of SunGard Consulting Services, a unit of SunGard Data Systems Inc. that sells risk-management software and systems to banks, says financial firms are “still developing the right technology, the processes and the right people to do this.”

“At the individual bank level, I think we’re safer,” Mr. Wallis adds. “I don’t know that on the macro level we really have a better handle on things. A lot of the risks that could hurt us are still not fully understood, or we don’t know how to detect them.”

Other bank-industry veterans are more optimistic. Donald Lamson, a partner at law firm Shearman & Sterling LLP who worked for 30 years at the OCC, predicts that the rise of risk managers “will change the world for banks because now they have to speak this language, they have to go through this process.” Under the new rules, “the point is you cannot have a system where an intermediary manager can block a recommendation by the risk manager.”

By some measurements, the banking industry has become less vulnerable. At the end of 2013, five of the largest bank-holding companies by assets had $792.83 billion in combined equity capital, a buffer against possible losses. The total is up 19% from $666.91 million in 2009, according to the OCC.

The same companies’ combined value at risk, an estimate of a securities firm’s exposure to losses in any given trading day, fell 64% to $381 million from $1.05 billion during the same period.

Part of the shift reflects regulatory cudgels like the Volcker rule, part of Dodd-Frank that curbs banks’ ability to bet with their own capital and led to an exodus of swing-for-the-fences traders. The 30 largest institutions also must pass annual “stress tests” by the Federal Reserve to raise dividends and buy back shares. Inside those companies, chief risk officers help lead the grueling, anxious process.

For decades, risk managers spent most of their time worrying about types of trouble seen as relatively easy to measure, such as vulnerability to interest-rate changes, stock-market swings or loan losses. Ambitious young executives often saw the risk-management department as a dead end.

At many banks, the number of employees responsible for steering clear of bad surprises is now climbing by more than 15% a year, recruiters say. “This is a real career path now, something people want to get into, not something they fall into,” says Jeanne Branthover, a financial-industry recruiter at Boyden Global Executive Search in New York.

Near the top of the corporate ladder, chief risk officers can earn roughly as much as a chief financial officer or general counsel. Before the financial crisis, chief risk officers got about one-third less, according to Ms. Branthover.

Federal regulators are tracking the pay figures as a gauge of how serious banks are about improving risk oversight. “Pay is how we can ensure these are people of stature and they’re competent,” says Mr. Curry, the OCC chief.

At Goldman, Chief Risk Officer Craig Broderick’s ascent to the management committee in February signaled the growing importance of the New York securities firm’s risk police since it became a bank-holding company during the crisis.

Officials won’t say how many employees work in risk management or compliance, but managers in that unit are known throughout Goldman as the “Federation,” a nod to the benevolent forces in “Star Trek” responsible for protecting members from intergalactic marauders.

The nickname was around before the crisis but seldom used outside the group. “If anyone ever wondered how important the Federation is to the firm, they don’t have to wonder anymore,” Lloyd Blankfein, Goldman’s chairman and chief executive, wrote in an email to The Wall Street Journal.

Mr. Broderick, a 55-year-old former assistant scoutmaster of his son’s troop, says his duties have grown far beyond quantitative risk management. They also include areas such as assessing and controlling exposure from Goldman’s digital infrastructure, derivatives-clearing operation, litigation and malfeasance by traders and other employees.

“People sometimes talk about building an airplane while it’s flying,” Mr. Broderick says. “To me, it feels like we’re turning a two-engine plane into a four-engine plane in flight.”

Wells Fargo’s Mr. Loughlin, 58, has had his office near John Stumpf, the fourth-largest U.S. bank’s chairman, president and CEO, since before the financial crisis. But Mr. Loughlin has gained even more authority.

After being promoted to chief risk officer in 2010, his duties expanded to include oversight of market-related risks and potential dangers that could hurt the entire company. “I’m afraid I brought the mood of the party down somewhat,” Mr. Loughlin told investors at a meeting in May. “That is my job.”

He also knows how to say yes. In February, Mr. Loughlin agreed to lower the minimum credit score for certain mortgages eligible for backing by the Federal Housing Administration, which helps first-time and low-income families buy homes. Wells Fargo said it would make loans to borrowers with credit scores as low as 600, down from its previous limit of 640. Borrowers with scores below 620 have traditionally been considered subprime.

Mr. Loughlin says the move doesn’t expose Wells Fargo to greater risk because the bank requires ample documentation of an applicant’s income and carefully scrutinizes the ability to make loan payments.

Write to James Sterngold at james.sterngold@wsj.com

 

 

Creating A Compliance Culture Should Include: The CEO and The Board of Directors ?

At JPMorgan, Trying to Do the Right Thing Isn’t Enough

Michael Reynolds/European Pressphoto Agency

Stephen Cutler, center, formerly the chief of enforcement for the S.E.C., is now on the receiving end of lectures from his successor.

 

By 
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.

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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.”

JP Morgan fined $920m and admits wrongdoing over ‘London Whale’

US’s biggest bank to pay penalties to US and UK regulators for ‘unsound practices’ relating to $6.2bn losses last year

JP Morgan has agreed to pay about $920m in penalties to US and UK regulators over the “unsafe and unsound practices” that led to its $6.2bn London Whale losses last year.

The US’s biggest bank will pay $300m to the US office of the comptroller of the currency, $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,” co-director of the SEC’s division of enforcement, George Canellos, said.

“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 US authorities are still pursuing JP Morgan. The Justice Department is pursuing criminal charges against some of the bankers responsible for the massive loss. In an indictment unsealed in federal court this week Javier Martin-Artajo, who oversaw trading strategy at the bank’s London office, and Julien Grout, a trader who worked for him, were charged with securities fraud, conspiracy, filing false books and records, wire fraud and making false filings to the SEC.

Grout’s lawyer said this week that his client was being “unjustly played as a pawn in the government’s attempt to settle its highly politicized case against JP Morgan Chase”.

The bank also faces another fine from the commodity futures trading commission which is still investigating whether the bank is guilty of market manipulation.

Jamie Dimon, the bank’s chairman and chief executive, initially dismissed the mounting losses at the bank’s London offices as a “tempest in a teapot”. In a statement 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.”

This week in a letter to staff he warned: “Unfortunately, we are all well aware of the news around the legal and regulatory issues facing our company, and in the coming weeks and months we need to be braced for more to come.”

The admission of wrongdoing is a major victory for the SEC. US judges in recent years have questioned fines where banks were allowed to neither admit nor deny wrongdoing. Judge Jed Rakoff blocked a 2011 SEC settlement with Citigroup because he said the lack of an admission of wrongdoing made it impossible for him to determine whether the fine was “fair, reasonable, adequate and in the public interest”.

 

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Dimon: JPM ‘Simplifying’ Its Business, Improving Compliance

 

Dimon: JPM ‘Simplifying’ Its Business, Improving Compliance

SEP 17, 2013 10:42am ET
 

WASHINGTON — JPMorgan Chase (JPM) is focusing on simplifying its businesses and improving compliance with regulatory requirements, Jamie Dimon said in an e-mail to employees on Tuesday.

The bank’s chairman and chief executive said that its recent exit from the student lending business and elimination of its physical commodities sales and trading businesses was an attempt to “refocus our priorities.”

“We have been asking our senior people to eliminate products and services that are not essential to serving our customers and are not core to our business,” Dimon wrote.

In the lengthy e-mail, Dimon said the bank is also working to confront the regulatory challenges facing it, including reviewing its foreign correspondent banking business, improving oversight of outside vendors, and adding regulatory compliance staff.

The e-mail comes as JPMorgan Chase nears a $750 million to $800 million settlement with regulators related to last year’s “London Whale” trading scandal. An announcement could come as early as this week.

It also is yet another sign of a newly resurgent Dimon who, after the criticism he took over the Whale incident, successfully fought off an attempt by shareholders to strip him of his chairman title earlier this summer. Since then, he has become more outspoken about the issues facing the industry and his institution.

The regulatory settlement is expected to include an admission of wrongdoing by the bank. Although Dimon did not reference it directly, he said in his e-mail that if “you don’t acknowledge mistakes, you can’t fix them and learn from them.”

“So now, as in the past, we are recognizing our problems, rolling up our sleeves and fixing them,” Dimon wrote.

That includes a renewed focus on the bank’s foreign correspondent banking business, an area that has gotten several large banks, including HSBC and Standard Chartered, into trouble recently with U.S. regulators.

JPMorgan Chase was slapped with a consent order from the Office of the Comptroller of the Currency in January over “critical deficiencies” with respect to its anti-money laundering practices. Many observers expect regulators to impose a monetary penalty on the bank soon over those failures.

Dimon said JPMorgan Chase is strengthening its internal controls “particularly around ‘Know Your Customer’ and transaction monitoring.”

He also said the bank is stepping up supervision of outside vendors, yet another area that has tripped up the bank.

“If a vendor or partner engages with our customers, we need to be as vigilant about their practices as we are about our own, particularly if they interact directly with customers,” Dimon wrote. “We are also proactively trying to decrease the number of vendors we have, which reduces complexity in our business and creates more jobs internally.”

Earlier this summer, JPMorgan Chase halted most sales to third-party collectors of credit card debts amid regulatory concerns over how it pursues payments from customers who are delinquent.

Dimon said that the bank has significantly boosted compliance resources, adding roughly 3,000 employees this year that are dedicated to risk, compliance and control efforts. The bank has also provided 750,000 hours of regulatory and control-related training related to topics like anti-money laundering and Dodd-Frank implementation, he said.

Dimon added that he has also tried to build a “more open and transparent relationship with our regulators.” He held town halls for examiners with the Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corp. in May and June. He also held a corporate town hall with bank employees who “regularly interact with regulators.”

“We discussed our culture of transparency, stressing the necessity of fully and accurately reporting material issues to our regulators in a timely manner and responding promptly to their requests,” Dimon said.

Dimon concluded by pledging to create a “best-in-class operating system” for the bank.

“Never before have we focused so much time, effort, brainpower, technological power and money on a single, enterprise-wide objective,” Dimon wrote. “Make no mistake — we are going to get this right.”