The Morgan Whale That Got Away

Bankers haven’t gone to jail because they haven’t committed crimes.

 
 

J.P. Morgan headquarters at Canary Wharf in London May 11, 2012.
J.P. Morgan headquarters at Canary Wharf in London May 11, 2012. PHOTO: © DYLAN MARTINEZ / REUTERS/REUTERS
 

Politicians and journalists have made careers of lamenting that too few bankers have been convicted of crimes. They overlook that, at least in America, to prove a crime you have to have enough evidence and that a mistake is not necessarily criminal. A case in point is the government’s recent decision to drop all charges against two of J.P. Morgan Chase ’s former traders in the London Whale trading bust.

In 2012 J.P. Morgan’s London-based Chief Investment Office ran up $6.2 billion in losses from bad derivatives bets. No customer funds were lost, and the bank posted a $5 billion profit in the second quarter of 2012. But the fiasco tarnished CEO Jamie Dimon’s reputation and prompted outrage in Washington.

Senate Democrats issued a report accusing the bank of misleading regulators and investors. An internal bank analysis said management “failed to obtain robust, detailed reporting” and “appropriately monitor the traders’ activity.” Bank supervisors didn’t perform due diligence, and Dodd-Frank’s safeguards on risky behavior failed.

 
 

J.P. Morgan ultimately admitted to keeping some of its bad bets under wraps and paid $920 million to settle civil charges with banking regulators. Yet Justice continued to pursue a criminal investigation with the Financial Fraud Enforcement Task Force, a coalition of 20 federal agencies, 94 U.S. Attorneys and states that the Obama Administration formed to prosecute bankers. While Justice wrung billions of dollars out of banks to settle claims related to residential mortgage securities—J.P. Morgan paid $13 billion in 2013—progressives demanded scalps.

U.S. Attorney Preet Bharara struck a nonprosecution agreement with the former J.P. Morgan trader Bruno Iksil —the so-called London Whale who executed the bad bets—in return for his cooperation. Justice used Mr. Iksil’s testimony to build a case against his colleagues Javier Martin-Artajo and Julien Grout, who were charged with conspiracy to falsify books and records, and wire fraud.

The traders’ “lies misled investors, regulators, and the public, and they constituted federal crimes,” Mr. Bharara said. “The difficulty inherent in precisely valuing certain kinds of financial positions does not give people a license to lie or mislead to cover up losses. . . . And that goes double for handsomely-paid executives.”

All of this made for nice political publicity, but it’s not easy to prove that a company’s employees “willfully and knowingly”—the standard for demonstrating criminal intent—misled investors. Especially when your chief witness has his own agenda. Earlier this year Mr. Iksil sent a letter to media outlets exalting himself as a whistleblower. He also announced a 400-page tell-all that essentially lays blame on everyone but himself, and he changed his story to blame Mr. Dimon and higher-ups without evidence to back it up.

In dismissing the charges against Messrs. Martin-Artajo and Grout, acting U.S. Attorney Joon Kim, who took over after Donald Trump fired Mr. Bharara in the spring, said that “based on a review of recent statements and writings made by Iksil, however, the government no longer believes that it can rely on the testimony of Iksil in prosecuting this case.”

Prosecutors are often reluctant to walk back charges when presented with exculpatory or contradictory evidence, and Mr. Bharara was rebuked by federal judges for his Captain Ahab pursuit of Wall Street whales. So credit to Mr. Kim for pursing justice rather than headlines. Justice’s failed prosecution underscores that most financial errors aren’t crimes, not that progressives will admit it.

Appeared in the August 7, 2017, print edition.

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