Recently, the Department of Justice and JP Morgan reached a $13 billion settlement deal over its involvement in the financial crisis. This settlement constitutes the largest combination of fines and damages paid by a single company in any settlement with the US government. As part of the settlement, JP Morgan acknowledged that it lied to investors during sales of its mortgage securities. $4 billion of the settlement will be used for consumer relief and $6 billion will be paid to investors.
While the settlement puts an end to the government’s civil claims against JP Morgan, this is hardly the end. The company faces a number of other legal challenges, including an ongoing criminal investigation. The settlement is only the latest deal related to the bank’s involvement in the financial crisis. It also paid more than $1 billion to settle claims by the SEC and other regulators and $4.5 billion to settle claim brought by 21 institutional investors. In fact, JP Morgan has stated that it has approximately $23 billion reserved for litigation costs.
The settlement comes in the wake of other high-profile cases involving the financial industry. For example, in early November, the hedge fund SAC Capital pleaded guilty to insider trading, and jury selection for the criminal trial of one of its portfolio managers began on November 19. Earlier this year, Philip Falcone, the head of the hedge fund Harbinger Capital Partners, also admitted wrongdoing and agreed to leave the investment business for the next five years.
At first blush, these cases may indicate that the SEC has gotten tough on Wall Street. But others are not convinced. In a recent New Yorker profile of Mary Jo White, the head of the SEC, Nicholas Lemann explains the difference between the SEC as an enforcement agency and the SEC as a regulatory agency. Lemann suggests that the SEC’s recent actions reflect a focus only on prosecuting those who have broken laws (Lemann writes “under White, the SEC had grown fangs”), without reflecting an interest in creating regulations that address the underlying causes of the financial crisis. Lemann states that the agency’s regulatory actions “might as well be taking place in secret”. Lemann also highlights two problems the SEC has struggled to address: new, risky trading practices enabled by technological innovations, and the influence of lobbyists.
High-frequency, high-speed trading now dominates the market. Such trading depends on computer algorithms that analyze trends and execute trades at incredible speeds. When the algorithms get it wrong either because of a coding bug or by selling massive amounts of stock without regard to other market factors, they can severely disrupt the market. And such problems are not simply theoretical: high-speed trading led to the May 6 Flash Crash in 2010, for example. Other challenges fueled by the computerization of markets include the emergence of private, unregulated or lightly regulated markets such as SharesPost, SecondMarket, or markets referred to as dark pools. These all present regulatory questions that, according to Lemann, the SEC has largely ignored.
Lobbyists, meanwhile, have been working to repeal or modify parts of the Dodd-Frank act intended to address some of the practices that contributed to the financial crash. A recent example is HR 992, a bill introduced in the House in late October. That bill, which proposed amending the derivative provisions of Dodd-Frank, was heavily influenced by lobbyists from Citibank. Some parts of the bill appeared virtually copied word-for-word from recommendations made by Citibank lobbyists.
Politics and technology are two forces that put the SEC in a difficult position. The rapidly evolving market seems to outpace regulators while, even as increased public scrutiny has made the SEC take strong, visible action against unscrupulous investors, the laws of the SEC are being potentially rewritten. So, while some may hail the JP Morgan settlement as the beginning of a new chapter in SEC history, an important question remains unanswered: will the SEC be able to keep up?