Chasing Compliance

JPMorgan has paid out billions in penalties. Did it fix the problems?

, Corporate Counsel

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J.P. Morgan CEO Jamie Dimon
J.P. Morgan CEO Jamie Dimon

Madoff scandal. LIBOR conspiracy. London Whale fiasco. The names roll out like the titles of Tom Clancy novels. But this is not the stuff of fiction. This is the real-life rap sheet of JPMorgan Chase & Co. (JPMC)

And these episodes aren't cheap. The beleaguered bank has paid more than $20 billion in the past year in fines, penalties and legal settlements with both regulators and clients. That doesn't include the untold millions spent in legal fees defending itself from more than a dozen allegations ranging from mortgage securities fraud to violations of anti–money laundering laws.

For more than 18 months, the bank endured heavy flak from many sides. After traders in London lost $6.2 billion in bad derivatives deals—the so-called London Whale case—the U.S. Securities and Exchange Commission and the Board of Governors of the Federal Reserve System blasted the bank for deficiencies in its risk management and internal audit controls. The Fed also criticized the failure of "senior management's elevation of issues to the board of directors," which suggests that executives knew about the losses long before they told their board.

A spokesman said bank officials would not comment for this story. But under pressure from regulators, the bank hired more than 3,000 employees last year to enhance its risk and compliance efforts. It also hired a new compliance chief and removed the compliance function from the purview of general counsel Stephen Cutler. In statements to shareholders and employees, chairman and chief executive Jamie Dimon expressed humiliation over bank mistakes. He said the bank spent over $1 billion in 2013 on reforms, and he vowed, "Our control agenda is now priority No. 1."

That's just not enough for some critics. Take, for example, William Black, a law and economics professor at the University of Missouri–Kansas City, who has attacked the bank's misconduct. "JPMorgan Chase has been running the largest financial crime spree in world history," Black charges. "It's not even close."

Black speaks from experience. He is a former general counsel of the Federal Home Loan Bank of San Francisco, ex–senior deputy chief counsel for the Office of Thrift Supervision, and former litigation director of the Federal Home Loan Bank Board. He played a key role in investigating and bringing to justice hundreds of crooks during the savings and loan scandal in the 1980s and 1990s. The title of a book he authored makes clear how he feels about financial institutions. It's called "The Best Way to Rob a Bank Is to Own One" (University of Texas Press, 2005).

So it's understandable that Black is livid that no individuals were charged in any of JPMC's wrongdoing. He says the U.S. Department of Justice not only fails to hold bank officers accountable under criminal law, it refuses to bring civil fraud actions against individuals at JPMC or other big banks. "Rather than go after the London Whale, [prosecutors] go after the minnows. They should die of embarrassment," the professor says.

Black is not alone in his criticism. The New York Times recently editorialized against the "prosecutorial weakness" shown against JPMC and other large banks—a weakness that has led to "a distortion of justice." In another Times article, Massachusetts Institute of Technology business professor Simon Johnson blamed JPMC's compliance failures on the bank's size—it is the country's largest bank by assets. Johnson wrote, "Force the biggest banks to break up, and you will get better-run operations with much tighter control over ethics and business practices."

And Los Angeles Times columnist Michael Hiltzik was even harsher. He skewered the bank for failing to report suspicious activity in the Bernie Madoff Ponzi scheme. "JPMorgan has been racking up multibillion-dollar settlements over white-collar misdeeds on an almost monthly basis lately," Hiltzik noted. "It hasn't been operating like a bank, but like a criminal enterprise."

The Madoff issue is the most recent of JPMC's problems to be settled. In January federal prosecutors charged the bank with two felonies, saying it turned a blind eye as Madoff used a primary account in New York, known as account #703, for nearly two decades to run the world's largest known Ponzi scheme. The government deferred prosecution on the charges while the bank agreed to forfeit over $2 billion in penalties and restitution. For the charges to be dismissed, the bank must cooperate with ongoing probes, enhance compliance and avoid any further criminal charges for two years.

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