October 15, 2013
I respectfully dissent from the settlement Order with JPMorgan Chase Bank (JPMorgan) resolving charges against JPMorgan for use of a manipulative device with respect to the so called "London Whale" trades in violation of Section 6(c)(1)1 of the Commodity Exchange Act (CEA) and Regulation 180.1.2
As I explain in more detail below, I would prefer a twofold approach. First, the Commission should have taken more time to investigate whether the company is liable for a more serious violation, namely price manipulation. Second, since the "manipulative device" charge has not been tested before, I strongly believe that the courts must decide this case of first impression in order to set precedent and to guide both the Commission and market participants.
As a threshold issue, I question whether it is in the·public interest to settle with JPMorgan on a lesser "manipulative device" charge. I am concerned that in a rush to join in on a settlement brokered by other regulators, the Commission may be missing the opportunity to pursue allegations of greater wrongdoing—price manipulation.
In other words, the Commission's abbreviated investigation has failed to determine whether JPMorgan intentionally or recklessly manipulated the price of a particular type of credit default swap index known as "CDX."
Remarkably, the Order discusses the Commission's broad manipulation authority at length, but still does not conclude whether JPMorgan's aggressive trading strategy resulted in price manipulation. Failure to do so undermines the Commission's integrity and its enforcement powers in favor of taking shortcut's to achieve high-profile settlements.
I am also concerned that by accepting this settlement, the Commission may be missing the opportunity to establish a legal standard for a "manipulative device."
Because the settlement Order does not allege that JPMorgan engaged in manipulative or fraudulent conduct, I believe the Commission needs to do a better job of explaining why the company's aggressive trading strategy constitutes a "manipulative device."
Regrettably, neither the CEA nor Commission regulations define a "manipulative device." This lack of a legal standard makes it even more difficult to determine whether JPMorgan engaged in a reckless behavior that put the company at risk or whether such behavior constitutes a "manipulative device."
Although, some case law supports the Commission's conclusion that any device that is intentionally employed to distort a pricing relationship may be manipulative, the Commission has failed to produce data or conduct a more careful evaluation of the actual price to determine whether JPMorgan's conduct distorted the price of certain CDX indices.
This problem is compounded even more by the fact that the allegations in the settlement Order center on bilateral or over-the-counter trading. Given this trading environment, I am not clear how the Commission can distinguish between "real" and "distorted" prices if the trades were executed through bilateral negotiations.3
To reiterate, a better approach would have been for the Commission to fully utilize its expanded enforcement authority and conduct a more comprehensive investigation to establish whether there was price manipulation, rather than rush to settlement. As to the manipulative device charge, a better course would have been to have a federal court take a fresh look at this case to clarify the ambiguity in the Commission's new authority.
1 7 u.s.c. § 9 (2012)
2 17 C.F.R. § 180.1 (2012)
3 The Commission alluded to the issue of "real" versus "distorted" pricing in OTC trading when it promulgated Regulation 180.1. In the rule preamble, the Commission stated that "the failure to disclose ... information [about market conditions] prior to entering into a transaction, either in an anonymous market setting or in bilateral negotiations, will not. by itself, constitute a violation of final Rule 180.1" (emphasis added). 76 FR41398 at41402 (July 14, 2011).
Last Updated: October 16, 2013