09:10 AM
How the SEC Could Pursue A Case Against JPMorgan
JPMorgan Chase's failure to timely disclose a major change in how it measured risk could become the centerpiece for an enforcement action by U.S. securities regulators as they probe the bank in connection with its multibillion dollar trading loss.
By omitting the change from its earnings release in April, the bank disguised a spike in the riskiness of a particular trading portfolio by cutting in half its value-at-risk number.
JPMorgan did not tell investors that the model for its Chief Investment Office had been changed until May 10, the same day it revealed the failed hedging strategy had produced a loss of at least $2 billion.
Securities and Exchange Commission Chairman Mary Schapiro said last month that her agency is probing the bank's financial reporting and made a vague reference to banks' obligation to publicly disclose changes to their risk model.
Experts say that regulators' strongest potential case is one focusing on whether JPMorgan should have disclosed the risk model change earlier.
But at the same time, they say it may be difficult to prove that the change in the risk model was material to shareholders' interests, which could limit the SEC's ability to use the JPMorgan investigation to appear tough on big banks playing fast and loose after the financial crisis.
"I would think this is a case that gets down to questions about just how aggressive the SEC wants to be," said Jim Cox, a professor at the Duke University School of Law.
JPMorgan chief Jamie Dimon, 56, is expected to be questioned over the change in the risk model on Wednesday when he is called before the Senate Banking Committee to testify.
Dimon has not said exactly when or why the model was changed, nor has he said who knew about it. He has said that the portfolio not only took on too much risk, but "was badly monitored."
Typically, changes in value-at-risk models at banks are made by committees composed of managers who monitor risks and business heads who take them, according to risk management experts.
Kristin Lemkau, a spokeswoman for JPMorgan, declined to comment.