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JPMorgan to pay $100 million in latest 'London Whale' fine

A trader works in the J.P. Morgan stall on floor of the New York Stock Exchange, September 14, 2009. REUTERS/Brendan McDermid
A trader works in the J.P. Morgan stall on floor of the New York Stock Exchange, September 14, 2009. REUTERS/Brendan McDermid

By Aruna Viswanatha

WASHINGTON (Reuters) - The London Whale is the gift that keeps giving for regulators.

JPMorgan Chase & Co has agreed to pay the latest in a string of fines for the disastrous trades and admit wrongdoing, this time in a settlement with the U.S. Commodity Futures Trading Commission.

The bank agreed to pay $100 million and admit its traders acted recklessly, the CFTC said on Wednesday. The bank was instructed to send the funds to accounts receivable at the CFTC's division of enforcement.

The settlement follows one month after it paid $920 million to four other U.S. and British regulators to resolve probes of the bank's $6.2 billion in derivative losses involving its chief investment office.

The episode has proven to be one that just about every regulator the bank deals with has wanted to investigate and levy fines.

The Justice Department, even after filing criminal charges against two former JPMorgan traders who allegedly helped conceal the losses, is still investigating whether to bring any action against the bank.

"We are pleased to be able to put behind us another aspect of the CIO (chief investment office) trading matter by the resolution of the CFTC investigation," JPMorgan spokesman Joseph Evangelisti said.

The settlement with the CFTC comes as JPMorgan continues to deal with regulators and U.S. authorities on a number of fronts.

The bank is the middle of trying to negotiate a global settlement with federal prosecutors over its role in the packaging and selling of faulty mortgage-backed securities that could result in a potential $11 billion settlement.

On Friday, JPMorgan announced it has set aside up to $23 billion in reserves to pay for all its potential legal bills to come.

The CFTC, in its case, charged the bank with violating a prohibition on manipulative conduct when it traded in the credit default swaps that the bank had built an outsized exposure to by early 2012 and then needed to quickly exit to try to minimize the losses.

By selling a huge volume of swaps in a concentrated period, the bank's traders "recklessly disregarded" the principle that legitimate market forces should set prices, the CFTC said.

"JPMorgan traders acted recklessly with respect to this fundamental precept by employing an aggressive trading strategy," the CFTC said in a portion of the settlement to which the bank admitted to.

The reckless conduct occurred on one day, February 29, 2012, according to the agreement.

One Republican commissioner, Scott O'Malia, voted against the settlement and said he thought the CFTC should have further investigated whether JPMorgan engaged in a more serious violation of price manipulation.

"I am concerned that in a rush to join in on a settlement brokered by other regulators, the Commission may be missing the opportunity to pursue allegations of greater wrongdoing," O'Malia said in a statement.

By charging the bank with "employing a manipulative device," the agency relied on new powers granted it by the 2010 Dodd Frank financial regulatory overhaul.

The agency previously had to prove a defendant intended to engage in manipulate conduct, a bar so high that the commission was able to bring few cases under it. The new authority, introduced by Democratic Senator Maria Cantwell, allows the CFTC to rely on evidence of "reckless" misconduct rather than any specific intent.

The CFTC case against JPMorgan "is exactly what were looking for" in providing the new authority, Cantwell said in an interview.

"We think it really does create a bright line in the marketplace," she said.

According to the CFTC charges, a JPMorgan portfolio in credit default indices with a net value of more than $51 billion started to plummet in January 2012. In February, as daily losses were large and growing, the traders tried to reduce their mark-to-market losses.

The chief investment office had a $65 billion short position on one index, CDX NA.IG9 10 year index, and on February 29, sold $7 billion in protection on it. The sales substantially dropped the market price of the index and improved the book value of the group's position, the CFTC said.

Two former bank employees have already been criminally charged with trying to hide some of the losses by deliberately giving inaccurate values to the securities involved in the trades.

The CFTC has been operating on a skeleton staff since the October 1 government shutdown, and called some employees in on Wednesday on an "emergency basis" to announce the settlement, Commissioner Bart Chilton said on CNBC.

(Reporting By Aruna Viswanatha and Emily Stephenson in Washington, and David Henry in New York; Editing by Andrew Hay, Matthew Goldstein and Cynthia Osterman)

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