JPMorgan to Pay $920 Million Penalty for London Whale Losses

According to the SEC’s order instituting a settled administrative proceeding against JPMorgan, the Sarbanes-Oxley Act of 2002 established important requirements for public companies and their management regarding corporate governance and disclosure.

Public companies such as JPMorgan are required to create and maintain internal controls that provide investors with reasonable assurances that their financial statements are reliable, and ensure that senior management shares important information with key internal decision makers such as the board of directors.

“JPMorgan failed to adhere to these requirements, and consequently misstated its financial results in public filings for the first quarter of 2012,” the SEC states.

According to the SEC’s order, in late April 2012 after the portfolio began to significantly decline in value, JPMorgan commissioned several internal reviews to assess, among other matters, the effectiveness of the CIO’s internal controls. From these reviews, senior management learned that the valuation control group within the CIO, whose function was to detect and prevent trader mismarking, was woefully ineffective and insufficiently independent from the traders it was supposed to police. “As JPMorgan senior management learned additional troubling facts about the state of affairs in the CIO, they failed to timely escalate and share that information with the firm’s audit committee,” the SEC said.

Among the facts that JPMorgan has admitted in settling the SEC’s enforcement action include:

• The trading losses occurred against a backdrop of woefully deficient accounting controls in the CIO, including spreadsheet miscalculations that caused large valuation errors and the use of subjective valuation techniques that made it easier for the traders to mismark the CIO portfolio.
• JPMorgan senior management personally rewrote the CIO’s valuation control policies before the firm filed with the SEC its first quarter report for 2012 in order to address the many deficiencies in existing policies.
• By late April 2012, JPMorgan senior management knew that the firm’s Investment Banking unit used far more conservative prices when valuing the same kind of derivatives held in the CIO portfolio, and that applying the Investment Bank valuations would have led to approximately $750 million in additional losses for the CIO in the first quarter of 2012. 
• External counterparties who traded with CIO had valued certain positions in the CIO book at $500 million less than the CIO traders did, precipitating large collateral calls against JPMorgan.
• As a result of the findings of certain internal reviews of the CIO, some executives expressed reservations about signing sub-certifications supporting the CEO and CFO certifications required under the Sarbanes-Oxley Act.
• Senior management failed to adequately update the audit committee on these and other important facts concerning the CIO before the firm filed its first quarter report for 2012.
• Deprived of access to these facts, the audit committee was hindered in its ability to discharge its obligations to oversee management on behalf of shareholders and to ensure the accuracy of the firm’s financial statements.

The SEC’s investigation is continuing.

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