Recent settlements by the Securities and Exchange Commission (SEC) have sent a dangerous message to Wall Street: feel free to lie freely to investors and shareholders as long as you have deep pockets.
In 2007, Citigroup told investors it had $13 billion in subprime exposures, knowing the figure was in excess of $50 billion. It got caught and on July 29, 2010 paid $75 million to settle charges with the SEC. Its CFO, Gary Crittenden, was fined a puny $100,000 and the head of its Investor Relations Department, Arthur Tildesley, was fined an even punier $80,000. That sent a clear message to Wall Street, lying about the risks you are taking or what’s on your balance sheet results in a slap on the wrist and some chump change. Lying has now morphed into its own profit center.
Also in July 2010, Goldman Sachs settled with the SEC for $550 million over its infamous Abacus deal where a hedge fund manager, John Paulson, hand picked the collateralized debt obligations that went into the deal and then wagered they would decline in value. Goldman was aware of this and declined to tell investors that bought into the deal.
Under the Securities Exchange Act of 1934, persons and/or corporations that make material omissions or misrepresentations can be charged in civil actions by the SEC as well as criminal securities fraud actions by the Department of Justice.
On June 19, 2012, when SEC Chair, Mary Schapiro, testified before the House Financial Services Committee regarding the $2 billion and growing losses at JPMorgan Chase, she indicated that the agency is reviewing the appropriateness of the disclosures that JPMorgan Chase made to the public.
Schapiro testified: “The SEC’s rules require comprehensive disclosure about the risks faced by a public company, including line item requirements for disclosure of specific information about risk…For example, Item 305 of Regulation S-K requires quantitative disclosure of a company’s market risk exposures, which includes exposures related to derivatives and other financial instruments.”
According to securities law experts, prosecutions by the SEC and DOJ for misstatements or omissions are not limited to SEC filings made under the 1934 Act. Any manner of publicized misstatement or omission can create liability. Courts have ruled that any deceit that materially affects the purchase or sale of securities is actionable. Lying through omission is legally interpreted as making statements that present an incomplete or inaccurate picture, and withholding other material information necessary to present the entire truth.
In a landmark 1976 U.S. Supreme Court decision, TSC Industries, Inc. v. Northway, Inc., Justice Thurgood Marshall, writing for the court, explained:
“Lying through omission consists of making statements that paint an incomplete or inaccurate picture, and not revealing other material information necessary to present the entire truth. The federal securities laws require public companies, whenever they speak, to disclose all material information that would be necessary to present the truth entirely.”
Against that backdrop comes the 10Q (first quarter) financial filing that JPMorgan Chase submitted to the SEC. The relevant portion is as follows:
“Since March 31, 2012, CIO [Chief Investment Office of JPMorgan Chase] has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO’s synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO’s AFS securities portfolio. As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.
“The Firm is currently repositioning CIO’s synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm’s overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.”
Nothing in this statement suggests that a momentous event has occurred – momentous enough to bring in the Department of Justice, the FBI, three Congressional hearings and the shaving, at one point, of $30 billion off the market capitalization of the firm.
What the statement does not capture is the following: JPMorgan Chase was selling tens of billions of dollars of credit default insurance to hedge funds in return for a large up-front payment and a quarterly income stream. It sold that protection in an off-the-run (outdated) derivatives index that is illiquid. AIG Financial Products blew up the behemoth AIG Insurance selling credit default insurance. The U.S. taxpayer had to bail out AIG and pay off that insurance to Wall Street firms like Goldman Sachs and JPMorgan Chase. That was just a little over three years ago. Should Congress and the regulators be caught off guard once again, there will be hell to pay.
On May 10, 2012, the same day JPMorgan filed its 10Q with the SEC, JPMorgan Chairman and CEO, Jamie Dimon, said on a conference call with analysts that the existing credit derivative losses were $2 billion and could grow. What he did not mention was anything about an internal document existing at that time that said the losses could grow to $9 billion. The difference between $2 billion and $9 billion is a very material number.
On June 29, 2012, Jessica Silver-Greenberg and Susanne Craig reported in the New York Times that “In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.” The operative words in that sentence are “April” and “$9 billion.”
The head of the Chief Investment Office in April was Ina Drew. Drew reported directly to Dimon. He admitted that in his testimony to Congress. If Jamie Dimon withheld from shareholders and investors that an internal report existed on May 10, 2012 (the date the firm’s 10Q was filed with the SEC and the date he personally spoke with analysts) indicating that these derivative losses could reach $9 billion, charges are most likely to be brought and massive class action lawsuits will, indeed, commence.
Oh what a tangled web we weave when first we practice to deceive.
- JPMorgan Chase CEO Dimon: Bank wasn’t gambling (cbsnews.com)
- JPMorgan’s gambling disrupted the markets more than imagined (americablog.com)
- Former Congressional, SEC Officials Take a Spin through JPMorgan’s Revolving Door (pogoblog.typepad.com)
- Report: JPMorgan trading losses may reach $9B (cbsnews.com)
- No sign of shareholder revolt against JPMorgan Chase CEO Jamie Dimon (cbsnews.com)
- A look at major financial settlements, at a glance (seattletimes.nwsource.com)
- This Is Clearly Going To Cost JPMorgan Much More Than $2 Billion (businessinsider.com)
- The Coming Derivatives Crisis – Bankers Gambling Addiction (vaticproject.blogspot.com)
- JPMorgan Trading Loss May Reach $9 Billion – NYTimes.com (nadernazemi.com)
- JPMorgan Chase Gets $14 Billion Per Year In Government Subsidy (fromthetrenchesworldreport.com)