JPMorgan Chase has agreed to pay $100 million and admit its traders engaged in reckless behavior to settle charges that it manipulated markets as part of its so-called London Whale trades on a specific day last year.
The fine and admission of questionable conduct are milestones for the Commodity Futures Trading Commission, which used new authorities granted under the Dodd-Frank Act to curb manipulative conduct. Among other things, the law allows the commission to crack down on those who "intentionally or recklessly" use "any manipulative device" or scheme to defraud other investors.
The CFTC said that JPMorgan traders in London sold off $7 billion in derivatives tied to a price index of corporate bonds on Feb. 29, 2012 — including $4.6 billion worth in a three-hour span.
Derivatives are investments whose value is based on some other investment, such as oil and currencies. JPMorgan was betting that the price of the index would drop. When the traders sold their derivatives, the price of the index plunged.
That was a "staggering volume" and the most ever traded by the bank in one day, according to the CFTC. The traders realized that the huge volume of the derivatives they had amassed could affect the market, and they decided to do so, the agency said.
The bank acknowledged the set of facts laid out in the CFTC's order — including that some of its London-based chief investment office traders "acted recklessly" by "employing an aggressive trading strategy" that ultimately cost the bank $6 billion. But JPMorgan stopped short of admitting manipulative conduct.
Its hedged acknowledgment could be key for the bank in staving off future related lawsuits.
Wednesday's settlement comes less than a month after JPMorgan agreed to pay $920 million and admit fault in a deal with the Securities and Exchange Commission and other U.S. and British regulators.
The settlement was complicated by the U.S. government shutdown, now in its third week, which has left the CFTC with only a skeleton staff.
In addition, one of the agency's four active commissioners, Scott O'Malia, objected to the JPMorgan deal, arguing that the settlement was rushed and that it missed an opportunity to pursue a tougher manipulation case.
"Failure to do so undermines the Commission's integrity and its enforcement powers in favor of taking shortcuts to achieve high-profile settlements," O'Malia stated in a written dissent.
In a CNBC interview shortly after the CFTC announcement, Commissioner Bart Chilton, who voted in favor of the JPMorgan pact, fought back.
"Some people don't like Dodd-Frank in general," he said, without mentioning O'Malia by name.
Speed was of the essence in this case, Chilton added. "These markets have changed," he said. "They're not like they used to be. The old standard didn't work so well. This is a significant fine."
The Justice Department has been investigating JPMorgan for possible criminal violations in connection with the London trades. One of the traders involved, Bruno Iksil, was known as the "London Whale" for the outsize bets he made that could roil markets.
JPMorgan was one of the few financial institutions to come through the 2008 financial crisis without suffering major losses. The London trading loss raised concern about continued risk-taking by Wall Street banks five years after the financial crisis plunged the country into the worst recession since the Great Depression of the 1930s.
The fallout ensnared JPMorgan CEO Jamie Dimon, who initially dismissed news reports of the huge bets by the London operation as a "tempest in a teapot." He later acknowledged the magnitude of the losses, admitted to Congress that the bank failed in its oversight and took a multimillion-dollar pay cut.
Federal prosecutors in New York filed criminal charges in August against JPMorgan traders Javier Martin-Artajo and Julien Grout. Martin-Artajo supervised the bank's trading strategy in London, and Grout, his subordinate, was in charge of recording the value of the investments each day. They were charged with conspiracy to falsify books and records, commit wire fraud and falsify filings to the SEC.
Both traders, through their lawyers, have denied any wrongdoing. No charges have been brought against Iksil. Prosecutors say he tried to raise questions about how his colleagues were recording the trades.
The settlement with the CFTC comes at a time when JPMorgan is in talks with the Justice Department to resolve unrelated claims dating back to the 2008 financial crisis. The payout could be as much as $11 billion to resolve claims over its sales of mortgage-backed securities in the run-up to the crisis.
The Associated Press contributed to this report.