US and UK regulators have fined JP Morgan Chase Bank a total of $920m (£573m) over 'serious failings' at the internal controls in its chief investment office (CIO), which saw the bank forced to restate its financial results in 2012 following $6.2bn (£3.8bn) of trading losses from high risk deals by the bank's 'London Whale' team.
As part of the co-ordinated global settlement, JPMorgan will pay a $200m (£124m) penalty to the Securities and Exchange Commission (SEC) after an investigation found the bank failed to ensure traders were properly valuing the portfolio, while senior management failed to inform the audit committee of the severe breakdown of internal controls.
The FCA has fined JP Morgan £137.6m for a number of breaches which it said 'demonstrated flaws permeating all levels of the firm' and were 'extremely serious such as to undermine the trust and confidence in UK financial markets'.
The FCA's own investigation found that JP Morgan traders had sought to conceal growing losses by mismarking positions, a practice which went undetected in 2012 owing to flaws in valuation controls, some of which had existed since 2007. A review of the CIO's valuation process failed to give sufficient weight to inconsistencies it uncovered, while findings made by internal audit were not escalated to senior management and therefore not considered as part of the review. In addition, the firm's senior management did not involve key parts of the firm's overall control framework in the review.
Tracey McDermott, the FCA's director of enforcement and financial crime said: 'There were basic failings in the operation of fundamental controls over a high risk part of the business. As things began to go wrong, the firm didn't wake up quickly enough to the size and the scale of the problems. What is worse, they compounded this by failing to be open and co-operative with us as their regulator.'
The FCA fine was discounted by 30% because JPMorgan made an early settlement, but is the second-highest levied by the regulator, topped only by the £160m paid by UBS for manipulating benchmark rates including Libor.
George Canellos, co-director of the SEC's division of enforcement, said: 'JP Morgan's senior management broke a cardinal rule of corporate governance: inform your board of directors of matters that call into question the truth of what the company is disclosing to investors. Here, at the very moment JP Morgan's management was grappling with how to fix its internal control breakdowns and disclose the full scope of its CIO trading disaster, the bank's audit committee was in the dark about the extent of these problems.'
The SEC penalty is one of the largest in the regulator's history and was described 'unprecedented for an internal controls case'. The SEC said money is to be placed in a fund for compensation of investors harmed by JPMorgan's inaccurate financial reports.
Tthe bank has also been fined $300m (£186m) by the Office of the Comptroller of the Currency y and $200m (£124m) by the Federal Reserve. Investigations by Commodity Futures Trading Commission and the FBI are ongoing.
JP Morgan, which has admitted to its failings, said there could be further fines in prospect.
