Even though Wall Street’s biggest banks each have decades-long histories of repeatedly breaking the law,[1] senior staff, supervisors, and executives of those banks are almost never charged either civilly or legally for that lawbreaking. However, the Department of Justice (DOJ) has criminally charged four of nine former JPMorgan Chase officers for engaging in an 8-year long crime spree from inside the bank.[2] Because DOJ has charged that JPMorgan’s trading desk was a “criminal enterprise” and that those individuals were engaged in racketeering, their conviction could be a gamechanger that substantially increases the risk for financial lawbreakers.
The individuals charged are former JPMorgan precious metals traders, importantly including an executive, the Managing Director who was the head of the precious metals trading desk (which DOJ has identified as a “criminal enterprise”). DOJ alleges that they engaged in an 8 year long criminal conspiracy, from 2008 to 2016, to fraudulently manipulate the precious metals markets. Prosecutors allege that these individuals engaged in a criminal practice called “spoofing,” which is a fraudulent and disruptive trading technique that involves “planting fake orders into the market to steer others into buying or selling at prices that favor” the spoofer at the expense of other market participants.
The prosecutors allege that the JPMorgan traders’ criminal conduct was especially brazen and resulted in significant profits for JPMorgan, and significant losses for the bank’s counterparties. Indeed, the magnitude of these crimes are proved by the huge amount of restitution and disgorgement ordered in related civil enforcement actions brought by the CFTC (more than $310 million and $430 million respectively). As former CFTC Commissioner Dan Berkovitz explained, the “scope of misconduct and market harm” from the spoofing operation “is unparalleled among prior spoofing cases brought by the Commission.”
The discussion below highlights key issues related to the trial, which begins on Thursday, July 7, 2022.[3]
GAMECHANGER #1: DOJ CHARGED AN EXECUTIVE AND TRADERS WITH VIOLATING THE ANTI-RACKETEERING LAW (RICO), RAISING PROSPECT OF SEVERE PUNISHMENT
One of the most consequential aspects of the case is that prosecutors have charged a Managing Director and three other traders with violating the Racketeering Influenced and Corrupt Organizations Act, or RICO, the law that was passed to bring down leaders of the Mafia and other gangs. For RICO to apply, prosecutors must identify a specific “criminal enterprise,” which in this case is the JPMorgan precious metals trading desk where the nine individuals worked. The use of RICO, extraordinarily rare if not unprecedented in cases involving banks and finance, signals a potentially more aggressive approach to cases of financial market manipulation. Importantly, RICO charges significantly enhances the potential penalties that apply to an individual if convicted.
That the government’s RICO charges (along with the bulk of the rest of the charges[4]) survived a motion to dismiss the indictment means that the RICO charges are legally viable as applied to criminal schemes of financial fraud. The use of RICO as a tool to combat financial crimes, with its significantly enhanced penalties, could result in more meaningful punishment and deterrence for would-be wrongdoers, something that is too often lacking when it comes to financial crimes. If these individuals are convicted, the use of RICO could be a gamechanger in prosecuting if not deterring white collar crime on Wall Street.
GAMECHANGER #2: MEANINGFUL INDIVIDUAL LIABILITY (AT LEAST FOR SOME)
Far too often when banks engage in serious misconduct, or more accurately when individuals who work at banks engage in serious misconduct, the only “person” that faces liability is the bank itself. This is so even though the only way for a bank to commit misconduct is for the individuals employed at the bank to break the law.
Failing to impose meaningful liability on the individuals who participated in and enabled the criminal conduct only rewards and, indeed, incentivizes more lawbreaking. That’s because the individuals get the upside of their criminal activity, in the form of bonuses and promotions and increased pay, while the bank’s shareholders get stuck with the bill for a settlement usually many years later. Fortunately, that is not the case here—not only is the government criminally prosecuting four individuals here, but the CFTC has brought individual civil enforcement actions against several other individuals directly responsible for the misconduct. This strategy, focusing on individuals who commit wrongdoing, and not just the entities they commit wrongdoing through, and using both civil and criminal actions as appropriate, is a promising approach to enforcement that should help deter other violations of the laws governing the financial markets.[5]
However, the DOJ has limited the individual liability in this case to only those working on the precious metals trading desk, stopping at the Managing Director (Michael Nowak) who was the head of the desk. Yet, according to DOJ, the precious metals desk was operating as a “criminal enterprise” within JPMorgan for 8 years supposedly without detection.
It is, at best, difficult to believe that a such a vast criminal enterprise could be operating under the noses of, but without the knowledge of, the many highly paid individuals at JPMorgan who are ultimately responsible for the bank’s legal compliance, management, and oversight. That includes numerous people working in the compliance, risk, and legal departments as well as internal and external audit. And, of course, it also includes senior management all the way up to the CEO of the bank who are responsible for compliance, as acknowledged in at least one version of JPMorgan’s Code of Conduct. The question remains why didn’t DOJ charge any of the people (either criminally or civilly) who were extremely highly paid to ensure that laws were not broken? After all, this criminal conspiracy went on for eight years! If those individuals were not knowingly involved, then – if they were doing their jobs – they had to be reckless or grossly negligent in not knowing.
One thing to watch for over the course of the trial is whether other individuals, especially those senior to the people charged, are implicated, either directly in the misconduct or, indirectly, for failing to detect and stop the misconduct.
GAMECHANGER #3: REVELATIONS ABOUT JPMORGAN’S CONDUCT, CALLING INTO QUESTION ITS SWEETHEART SETTLEMENTS WITH DOJ AND CFTC
In 2020, in the waning months of the Trump administration, DOJ handed JPMorgan an indefensible sweetheart settlement in this case, which were its third and fourth criminal plea agreements (the others involving shocking criminal conduct in enabling the Madoff Ponzi scheme and rigging the foreign exchange markets over many years). In fact, the criminal conduct in this case occurred while JPMorgan was already subject to a prior deferred prosecution agreement (DPA) and was on probation in another matter. Nevertheless, DOJ did not even mention those prior criminal proceedings and ignored JPMorgan’s 20-year recidivist record of breaking virtually every law and rule imaginable. DOJ merely handed JPMorgan yet another toothless DPA and a fine that was so small that it equaled just 9 days of profits.
That was for two separate and distinct criminal conspiracies conducted by staff, officers, and executives at JPMorgan Chase, one for seven years and one for eight years. In addition to the individuals committing those crimes, there was, at best, a complete breakdown of all of JPMorgan’s risk, legal, compliance, audit, and management controls, which are supposed to be sophisticated, state-of-the-art systems making such crimes virtually impossible and, if they occurred, to be quickly identified and stopped. Here, however, there were egregious crimes committed repeatedly year-after-year, generating substantial revenues and profits for the bank and compensation and bonuses for the individuals, and not just those charged here but also their superiors and other executives all the way up to the CEO.
If the trial reveals that other senior officers or executives at JPMorgan could have and should have detected and stopped the criminal conduct, it will call into question the terms of that settlement as well as the settlement JPMorgan reached with the CFTC. In addition to the deficient provisions of the settlement mentioned above, the CFTC also determined that the SEC should waive the so-called “bad actor disqualification” as detailed in a blistering dissent by CFTC Commissioner Dan Berkovitz. The securities laws prohibit so-called “bad actors” who violate certain laws, including the laws JPMorgan violated here, from taking advantage of exemptions from the requirement to register securities under the securities laws, but those exemptions can be waived by the SEC, which it does when the CFTC advises it to do so. Too often, the CFTC agrees to these waivers as a way to facilitate settlement of cases, choosing a quicker settlement over meaningful deterrence.
If the criminal trial reveals evidence that senior officers or executives at JPMorgan turned a blind eye to the criminal conduct – or worse, were aware of it – then that should call into question the settlements with the DOJ and the CFTC. At a minimum, it will again highlight how grossly deficient JPMorgan’s risk, legal, compliance, audit and management controls really were and, therefore, how inadequate the slap-on-the-wrist settlements really were.
THE BOTTOM LINE FOR ENFORCEMENT AGAINST WHITE-COLLAR CRIME
This prosecution could be a meaningful step forward in the effort to police our financial markets and hold individual lawbreakers accountable. It also serves as a reminder that effective enforcement of the laws against financial fraud and other criminal conduct has multiple essential ingredients, including:
- Bringing criminal actions, in addition to civil enforcement cases, where the facts warrant.
- Holding individuals, especially senior officers and executives, not just banks and junior level staffers, accountable.
- Imposing penalties that are more than a modest cost of doing business.
- Enforcing — not waiving — statutory disqualifications so culpable institutions suffer the consequences for violating the law and having to limit otherwise profitable business activities.
- Strictly and meaningfully enforcing the terms of agreements, including non-prosecution and deferred prosecution agreements, that companies enter to avoid prosecution.
- Treating corporate recidivists as actual recidivists, meaning there should be no sweetheart deals for repeat corporate offenders like JPMorgan, just as prosecutors would certainly not offer leniency to recidivist street criminals.
Once the trial is over, the evidence has come to light, the verdicts are rendered, and the sentences—if any—are meted out, we will have a better idea if this case is a gamechanger. For now, it is an encouraging development that merits very close attention.
[1] For details, see this report recounting 351 legal actions and over $180 billion in fines against Wall Street’s six largest banks over the last twenty years, which was updated here and here. For JPMorgan Chase’s repeated lawbreaking over those decades, see this report.
[2] The five other JPMorgan precious metals traders not currently on trial were named as co-conspirators. Two of those pled guilty, while the others have not been charged as of yet.
[3] Jury selection begins on Thursday, July 7th, and opening arguments will begin after the jury is selected but likely no sooner than Friday, July 8th.
[4] The other charges include fraud, spoofing, and attempted price manipulation.
[5] It is important that this not be either/or but both: the choice is not to charge the bank or individuals, but both should be charged and meaningfully punished if financial crimes are to be deterred.
