JPMorgan Chase & Co. (JPM) is soon expected to start resolving probes related to its ‘London Whale’ trading debacle. The company will likely pay a penalty in the range of $700–$800 million and also plead guilty.
JPMorgan’s ‘London Whale’ settlement will be with the U.S. regulators – the Securities and Exchange Commission (SEC), the Federal Reserve and the Office of Comptroller of the Currency – and the U.K.’s Financial Conduct Authority. However, chances of the overseer of derivatives market, Commodities Futures Trading Commission’s (CFTC) inclusion in the settlement are less.
The CFTC is probing whether JPMorgan’s trading desk manipulated a credit default index – IG9 – at the time of trading credit derivatives, which led to trading losses of approximately $6.2 billion.
The settlement will end the probe being conducted by the U.S. and the U.K. regulators. JPMorgan is currently being investigated on whether it disclosed the correct amount of losses in the ‘London Whale’ derivative trades to investors and regulators. The company’s risk control program is being questioned as well.
Further, the admission of wrongdoing will likely open up legal ways for investors to seek compensation for a fall in JPMorgan’s share prices following the ‘London Whale’ trading fiasco. This is expected to add more legal headwinds for the company. Nevertheless, management has tried to make amends by acknowledging its responsibility for the actions as well as by restating the first-quarter 2012 results.
Despite JPMorgan’s plans to end the probes, the Department of Justice (DOJ) is going ahead with its criminal case implicating two of the company’s former traders of conspiracy, fraud and making false SEC filings related to the ‘London Whale’ trading losses. Another former employee – Bruno Iksil – is cooperating with the investigators and has not been charged criminally.
The resolution of the ‘London Whale’ debacle will remove a major legal headwind for JPMorgan. However, the company, along with many other major banks such as Bank of America Corporation (BAC), Citigroup, Inc. (C) and The Goldman Sachs Group, Inc. (GS) continues to face various mortgage related investigations and lawsuits.
Recently, at the Barclays Global Financial Services Conference, JPMorgan stated that it would incur additional legal cost of more than $1.5 billion in the third quarter. Notably, at the end of second-quarter 2013, the company increased its anticipated legal losses (exceeding its existing litigation reserves) to $6.8 billion from $6.0 billion in the prior quarter.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).
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