Despite JPMorgan’s record spoofing fine, deterrence questions remain

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The lobby of JP Morgan headquarters is photographed through a window in New York May 22, 2012.

JPMorgan’s $920 million fine by U.S. regulators for “spoofing” in the precious metals and U.S. Treasury markets, the practice of giving a false impression of market demand by rapidly entering and canceling orders, would appear to be a sharp warning to the industry over the illegal practice. But whether the enormous penalty, which held no one criminally accountable, deters future misbehavior by large institutions is questionable at best, say legal experts.

While the size of the fine reflects evident dissatisfaction with JPMorgan, which has a long record of misdeeds in the industry, the settlement also seeks to demonstrate that spoofing is now considered as serious as rate-rigging, corruption or money-laundering scandals.

“There aren’t that many cases in the white-collar world that would warrant total penalties in these amounts,” said James McDonald, enforcement director at U.S. regulator the Commodity Futures Trading Commission, which together with the Department of Justice, led the prosecution of the bank’s activities. The size of the fine “reflects the scope and breadth of the conduct that’s at issue”, he said.

What the penalty puts into focus yet again is whether corporate malfeasance in financial services can be curbed solely by fines. The issue of monetary penalties versus jail time for senior executives has been debated endlessly since the financial crisis. Some legal experts believe a strong message has been sent and that other firms should be dissuaded from engaging in future misconduct.

“While we don’t see traders lining up to go to jail for this offense, the efforts by the Commodity Futures Trading Commission and the Department of Justice to prosecute clearly indicate that there is a threat of jail time,” said Eugene Soltes, professor at Harvard’s Business School, and an expert on white collar crime.

“Spoofing has just been an especially challenging area to secure individual level convictions. A record corporate level fine does help recognize that this conduct is wrong -- criminal in fact,” Soltes said. “For crimes like spoofing, compliance within banks really is the first line of defense. The sanctions will help prevent this conduct from reoccurring which ultimately is one of the most important objectives of white-collar sanctions.”

Other experts were less convinced, citing a long record of violations by JPMorgan over the past 10 years, along with repeated deferred prosecution agreements and the lack of individual accountability at the highest levels of the organization.

JPMorgan said those involved in the spoofing were no longer with the firm, and it said the Justice Department recognized that the bank had invested “considerable resources” in boosting its internal compliance policies, surveillance systems and training programs.


America’s largest lending institution is no stranger to financial wrongdoing and enforcement actions which have led the bank to pay enormous sums to U.S. authorities. According to “Good Jobs First,” a resource organization that tracks corporate misdeeds, JPMorgan Chase has paid over $34 billion in fines since 2010 for a wide range of violations, with the largest $30 billion related to financial offenses. A total of 81 case-incident “records” for financial offenses have occurred over the past 10 years, not including the latest settlement for spoofing crimes. The bank has also suffered an additional 67 incident records relating to competition, consumer protection, government contracting and employee-related offenses.

Better Markets, an industry watchdog, recently published its own analysis on JPMorgan’s wrongdoing, which covers a 20-year period until 2019. “JPMorgan Chase has a 20-year long RAP sheet that includes at least 80 major legal actions that have resulted in over $39 billion in fines and settlements,” the report said.

“Any other business in America with that recidivist record would almost certainly have been shut down by prosecutors long ago,” it said. However, it said, the largest banks are effectively shielded against executive prosecution and jail time.

Among the largest U.S. financial institutions, only Bank of America has generated more fines and penalties over the past 10 years, according to the violation-tracker application from “Good Jobs First,” with 213 “financial offenses” leading to $80 billion in fines.


If the Better Markets’ analysis is correct, how much hope is there in curbing bad behavior if all one needs to do is pay a fine?

“The idea of large penalties and deferred prosecution agreements, as in the JPMorgan case now, has been around for some time,” said Shivaram Rajgopal, professor at the Columbia Business School.

“The large fine is levied on the firm but the CEO or other top officers are not charged. Everyone is happy. The regulator has collected a large fine and the firm is happy to get the scandal off their back and move on. No one goes to jail,” Raigopal said.

Moreover, according to an industry analysis by Raigopal, there appears too few, if any, repercussions for the chief executives of banks for corporate wrongdoing and fines paid to authorities. The resignation by John Stumpf, former CEO of Wells Fargo, who stepped down due to the bank’s unlawful sales practices, appears to be an outlier.

“Will this event at JPMorgan affect (CEO) Jamie Dimon’s reputation or pay? I don’t think so,” said Raigopal.

Financial penalties also fail to have any meaningful impact on the share price of firms, according to John Coffee of the Columbia University’s law school. In research included in his recent book on corporate crime and punishment, Coffee looked at a sample of the 25 largest fines ever imposed on corporations listed on U.S. exchanges.

What happens to their stock prices on the date of their fine? “They virtually all went up by a statistically significant margin, net of the market,” Coffee told Regulatory Intelligence. “Other samples produce the same result, net of the market, suggesting that large financial penalties on the corporate entity do not deter very well.”

“This is not a call for lower penalties, but for a focus on individual executives,” said Coffee. “Today, when faced with a governmental investigation, corporate executives --high and low--face a choice: do they risk personal liability or do they settle with their shareholders’ money. Surprise of all surprises, they would prefer to plead the corporation guilty or in a civil case to pay a large settlement to the SEC and others.”

In 2016, a U.S. judge sentenced futures trader Michael Coscia, principal of New Jersey-based Panther Energy Trading, to three years in prison for spoofing. He was the first person criminally convicted of the manipulative trading practice.


What the JPMorgan cases demonstrates, according to others, is the conundrum facing regulators of large financial conglomerates. Bad things happen inside them despite all the compliance systems that they have put in place. JPMorgan said it has spent more than $430 million recruiting hundreds of new compliance officers and increasing its internal audit budget, following its fine for manipulating currencies markets in 2015.

Regulators and the Justice Department may want to punish them for financial wrongdoing, but they fear going farther in the punishment, such as restricting the conglomerates’ activities in any meaningful way, which might be more effective in deterring future misconduct, said James Fanto, professor at the Brooklyn Law School.

“The conglomerates are so big and involved in so many financial activities that the regulators do not want to threaten their existence in any way that could cause a systemic problem to the financial system,” Fanto said.

Further compounding the issue is that it is “hard to prosecute anyone at the top, given how far the top executives and the board are from the conglomerate’s day-to-day activities and given the sheer number of the activities,” Fanto said.

“In a sense, we remain in the same place as we were before and after the financial crisis of 2007-08. The financial conglomerates have only gotten bigger. While their compliance and risk management systems have improved, there are still holes in them, as one might expect in organizations of such size,” Fanto added.

“They may just be of such a scale and scope that defy proper management, which was one of the arguments for breaking them up following the crisis. That opportunity passed.”

(Henry Engler, Regulatory Intelligence, New York)

This article was produced by Thomson Reuters Regulatory Intelligence - - and initially posted on Oct. 5. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters