Due in large part to the $9.2 billion it set aside to cover mounting legal expenses, JPMorgan Chase, the nation’s largest bank, suffered its first quarterly loss under CEO Jamie Dimon. JPMorgan reported a loss of $380 million, or 17 cents per share for the third quarter, compared with a profit of $5.71 billion, or $1.40 per share just a year earlier. This cast a somber tone for the unusually humble Dimon, stating that the loss was “very painful for me personally.”
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Once again, JPMorgan found itself discussing yet another settlement and facing bad publicity linked to excessive risk-taking. Last week, news broke that the bank had agreed to a $920 million settlement in the “London Whale” derivatives trading case; plus, the Consumer Financial Protection Bureau ordered JPMorgan to refund over $300 million to customers based on alleged wrongdoing in its credit card and debt collection procedures.
Another settlement deal surfaced this week—and its numbers are much larger. The U.S. Department of Justice is seeking $11 billion (with a ‘B’) in compensation for JPMorgan’s actions leading up to the Financial Crisis, including selling mortgage backed securities the bank knew were essentially worthless. According to the Washington Post, it would be “the biggest settlement a single company has ever undertaken.” On Thursday, the bank’s visible CEO Jamie Diamond flew to Washington, D.C., to meet with Attorney General Eric Holder for nearly an hour. Instead of lobbying for looser restrictions on Wall Street, Diamond was seeking an end to federal and state probes (which still represent a large liability to the bank) and, perhaps more importantly, attempting to avoid criminal charges.
All of the rhetoric and press releases notwithstanding, the Administration’s handling of numerous JPMorgan investigations has been properly criticized for missing an opportunity to charge top Executives. The S.E.C., D.O.J., and other regulators have thus far failed to press criminal charges, even when financial disclosures have misrepresented the bank’s business or mortgage-backed products. To be sure, the government has charged front-line traders in the London Whale case, but those tasked with overseeing the bank’s actions have escaped indictment—perhaps for the very reason that Mr. Diamond is willing to personally negotiate with the nation’s top law enforcement official on their behalf.
While the financial penalties being discussed are stiff, they represent only a small fraction of the damage done to the global economy, JPMorgan shareholders, and (ultimately) dinner tables across the country. Columbia Law School professor John C. Coffee Jr. provided some insight to the back-and-forth. He told the Post: “If I was in [Holder’s] position, I would be concerned about my legacy. . . . There’s been a lot of criticism of officials in Justice being much too soft, timid.”
Federal District Court Denies Motion To Dismiss SEC Suit Alleging General Partnership Interests Were Securities
[Editor’s Note: The following post is authored by Goodwin Procter LLP]
A California federal court recently declined to dismiss an SEC lawsuit over alleged fraud and securities registration violations in the sale of general partnership interests. In denying the Defendants’ motion to dismiss, the court held that the SEC had pled sufficient facts to establish that the general partnership interests at issue in the case were securities under federal securities laws. Read the rest of this entry »
[Editor's Note: The following update is authored by Arnold & Porter LLP]
On July 2, 2013, the Securities and Exchange Commission (SEC) announced three new enforcement initiatives: the Financial Reporting and Audit Task Force, the Microcap Fraud Task Force, and the Center for Risk and Quantitative Analytics. According to the SEC’s announcement, these initiatives are an effort to “build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas of the market and bring cutting-edge technology and analytical capacity to bear in its investigations.” Read the rest of this entry »
The SEC has charged former Oregon gubernatorial candidate, Craig Berkman, with a violation of the antifraud provisions of federal securities laws. Berkman’s fraud has been referred to as a Ponzi-like scheme where investors were promised access to pre-IPO shares in Facebook, Groupon, Zynga, and LinkedIn. The SEC alleges that John B. Kern, and Berkman’s lawyer, aided and abetted this violation.
On February 27, 2013 the Supreme Court handed down a unanimous decision holding that the Securities and Exchange Commission (“SEC”) may not invoke the “discovery rule” when bringing fraud charges under the Investment Advisors Act. 15 U.S.C. §§ 80b-6(1), (2). The “discovery rule,” so often extended to plaintiffs in private actions, triggers the statute of limitations at the time fraud is discovered by the plaintiff. The “standard rule,” on the other hand, triggers the statute of limitations when the alleged illegal acts occurred.
In the Supreme Court’s decision in Gabelli v. SEC, the Court chose not to extend the plaintiff-friendly discovery rule to the SEC. The reasoning was based on the asymmetries between the discovery powers of private plaintiffs and the nation’s securities regulation agency. The Court specified that the federal government had powerful discovery tools, such as the power to “subpoena data, use whistleblowers and force settlements” and that this should ensure “timely action.” Moreover, the Court noted, “[T]he SEC’s very purpose is to root [fraud] out.” The Court rested the distinction on the equitable nature of the discovery rule: the SEC’s mission of discovering and prosecuting fraud, coupled with its powerful enforcement tools, “[are] a far cry from the defrauded victim the discovery rule evolved to protect.” In the Court’s view, the SEC did not need the discovery rule.
The Supreme Court’s decision led to mixed reactions. The result in Gabelli came with the approval of the Cato institute, which filed an amicus brief for the defendants. In contrast, many investors were disappointed, concluding that those who contributed to the financial crisis will continue to go without sanction. Members of the “Occupy the SEC” movement (whose amicus brief can be found here) called the decision a “boon for fraudsters.”
The Network first covered this story the day after the Court handed down its decision. See the archived “Week in Review” post here.
In a unanimous opinion yesterday, the Supreme Court limited the SEC’s ability to pursue civil penalties. The Court held that the five-year statute of limitations begins to run at the moment a fraud is committed, not when regulators become aware if it. In the case at issue, Gabelli v. SEC, the agency sued in 2008 for alleged violations occurring between 1999 and 2002. Chief Justice Roberts noted practical difficulties in determining when a large governmental agency first discovers a fraud, concluding that Congress had not intended to permit the SEC to bring such actions so late. Read the opinion here. For more, see Reuters.
Two days until the sequester. Congressional leaders are meeting at the White House this morning, but both sides appear to be bracing for $85 billion in across-the-board cuts on Friday, March 1. While yet another short-term bill might resolve immediate funding concerns, the parties thus far remain gridlocked on tax reform proposals, which both recognize as an important bargaining chip. House Speaker John Boehner has recently appeared more willing to tackle a comprehensive tax deal this Congress, but a solid democratic majority in the Senate is unlikely to concede to his current “no tax increases” position. For more, see NYTimes, BBC and Politico.
AT&T has announced plans to expand into Europe with new lines of business, including wireless home-monitoring and automation. The company will license its new Digital Life product to more than 30 companies worldwide, exceeding anticipated demand. The move shows that AT&T, the U.S.’s largest phone provider, is transitioning to become a more general technology company, as consumers are increasingly seeking around-the-clock wireless connectivity and product integration. For more, see Bloomberg.
The Ninth Circuit recently affirmed a judgment – from the Central District of California – that the victims of Bernard Madoff’s Ponzi scheme lack subject matter jurisdiction to sue the Securities and Exchange Commission as an agency of the United States under the Federal Tort Claims Act.
The SEC compiled a 450-page public report highlighting its failure to uncover Madoff’s problematic investment activities. The allegations posed by the victim plaintiffs centered on decisions made by the SEC which the district court acknowledged “should have and could have been made differently” and “reveal[ed] the SEC’s sheer incompetence.” Nevertheless, the court held that the United States was protected from suit because the Securities and Exchange Commission was engaged in a discretionary function. An exception is set aside in the Federal Tort Claims Act (“FTCA”) whereby employees of the Government cannot be held liable for failures relating to purely “discretionary” functions of that employee.
The district court, considering the legislative history of the FTCA, noted that Congress “repeatedly and explicitly suggested” that the SEC should be shielded by the discretionary function exception. The FTCA only allows a claim where statutory language mandates a particular course of action. By contrast, the duties and functions of the SEC allow it discretion in choosing who to investigate and when to bring enforcement proceedings. Because the plaintiffs could not demonstrate that the SEC violated a specific and mandatory policy directive that related to the investigation, the court held they failed to overcome an FTCA claim’s threshold requirement.
The Department of Justice recently brought charges of mail fraud, wire fraud, and financial institution fraud against Standard and Poor’s Rating Service, owned by parent company McGraw-Hill. It was filed in federal court in Los Angeles. (Read full complaint here).
The DOJ’s civil action against S&P calls for at least $1 billion in civil penalties, and the complaint alleges the rating agency defrauded investors out of as much as $5 billion. The fraud is claimed to have occurred as S&P purposely misled investors in an effort to increase the use and revenue of its ratings service. S&P’s press release denied any allegations that the company behaved in any manner other than “good-faith” when grading RMBSs and CDOs, and further questioned the legal merit of DOJ’s case.
The complaint states that DOJ is going to use the Financial Institutions Reform, Recovery, and Enforcement Act to extract civil penalties from S&P for misrepresenting material facts to investors in an effort to increase profits and market share for its rating business. FIRREA was enacted in 1989 in response to the Savings and Loan Crisis. The statute was little used before it was resurrected by prosecutors who realized the statute might be of particular value for pursuing fraud that occurred during the sub-prime mortgage crisis. FIRREA is a particularly strong tool for prosecutors because it imposes large civil penalties (up to $1 million per offense), has a long statute of limitations period (10 years), and allows prosecutors to have much greater investigative tools than they would normally enjoy in a civil case (e.g. prosecutors can take testimony from individuals).
Perhaps most importantly, FIRREA only requires that prosecutors prove their case by a preponderance of the evidence. The statute could essentially give DOJ many powerful evidentiary tools and punitive remedies, most commonly seen in criminal cases, but would not require them to demonstrate their case to the onerous reasonable doubt standard.
Because DOJ lawsuit against a ratings agency is uncharted legal waters, much remains to be seen about the merits of the case. Berkeley Law Professor Stavros Gadinis notes that courts have required a high evidentiary burden in the context of fraud litigation in order to curb frivolous or unmeritorious claims. “In Tellabs v. Makor, which concerned 10b-5 litigation, the Supreme Court held that, in order to establish scienter (broadly speaking, intent to defraud or knowledge), courts must look at the evidence as a whole, and not at just excerpts hand-picked by the plaintiffs.” Professor Gadinis explained, “In the S&P’s case, this could mean that, if one looks at email correspondence as a whole, their employees have expressed enough support for their ratings to disprove the claim that these ratings were clearly part of a scheme to defraud.” However, because FIRREA has been rarely been utilized, there is little case law to aid in forecasting how a court might rule. Gadinis emphasized that the reasoning in Tellabs pertained to 10b-5 litigation, thus the extension of the Court’s reasoning to FIRREA “remains an open question.”
According to a recent Wall Street Journal article, company executives continue to generate significant profits trading company stock, despite the presence of Rule 10b5-1 trading plans designed to prohibit insider trading. The article, combined with a petition by a group of pension funds urging reform of 10b5-1 trading plans, likely will increase pressure on corporate boards to monitor 10b5-1 trading plans and trades made under such plans. In a recent client alert, Wilson Sonsini explains the 10b5-1 reform proposal. Wilson Sonsini attorneys Steve Bochner and Nicki Locker also will be hosting a webinar focused on managing the risks associated with these developments.
As mentioned previously, FCPA and other corruption-related enforcement of foreign transactions is on the rise. Additionally, while emerging markets often present the best growth opportunities, they also present the greatest corruption risks. In a recent client alert, Skadden explains the substance and scope of the FCPA as applied to international mergers, focusing on those in emerging markets. The alert specifies potential high-risk areas and the role of due diligence and an effective compliance program in uncovering and remedying these risks.
“Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co., Inc. (“Glass Lewis”), the two major proxy advisory firms, recently released updates to their proxy voting policies for the 2013 proxy season. A summary of the updates to the Glass Lewis Guidelines is available here.” Gibson Dunn’s recent client alert “reviews the most significant ISS and Glass Lewis updates and suggested steps for companies to consider in light of these updated proxy voting policies.”