The Need for Criminal Prosecutions to Redress the Bank Excesses of the LIBOR Scandal

Enforcement of Regulations with the Resources to Seek Criminal Penalties
  • Regulators must seek jail time to deter future criminal activity, especially after such egregious fraud as misquoting the reference lending rate for $800 Trillion of contracts
Occupy the SEC ( is pleased to see that the CFTC has acted upon Barclays’ extensive and long-term practice of fraudulent pricing of LIBOR and EURIBOR.  The CFTC’s $200 million dollar settlement with Barclays, the Department of Justice’s penalty of $160 million and the United Kingdom’s FSA settlement of £59.5 million are significant enforcement achievements.  Barclays’ mispricing of reference rates has affected entire economies throughout the globe, given that businesses of all sizes routinely borrow on reference rates tied to LIBOR and Euribor.  This arbitrary and self-serving rate settings affected corporate customers, floating rate lenders, derivative counterparties and ultimately any entity or person doing business with companies borrowing at LIBOR.  There is a strong argument to be made that while $452 million of total settlements that Barclays agreed to is not an insignificant amount, it pales in comparison to the damages caused by incorrect pricing on HUNDREDS of TRILLIONS of dollars of financial contracts.  More recent developments have made clear that criminal manipulation of LIBOR has extended well beyond just Barclays.
Many of the banks involved in LIBOR and Euribor pricing were borrowing at prices typically significantly higher than their LIBOR and Euribor quotes during the period in question, and we have strong reason to believe that mispricing of these reference rates was rampant throughout the industry.  Accordingly, we hope the CFTC and other bank regulators do not limit their investigations to Barclays, and instead scrutinize the activities of all of the banks that participated in the setting of these reference rates.
Further, Occupy the SEC expects the regulators to pursue criminal prosecution of the individuals that participated in this fraud.  The CFTC’s press release makes clear that it knows the exact identities of the principal actors behind this criminal activity.  Occupy the SEC believes the U.S. has historically had been viewed as the strongest, fairest and most transparent financial market in the world.  The entire U.S. economy benefits from this leading position.  Yet if our regulators do not prosecute perpetrators, financial institutions will continue to act fraudulently.  Regulatory fines will be disregarded as the mere cost of doing business, and will lose their deterrent value.  When regulators fail to prosecute, individual perpetrators often walk away scot-free, free to collect their bonuses and continue engaging in similar activities at the same or another institution.
We encourage the regulators, particularly the SEC, to continue to use all the investigative and prosecutorial powers at their disposal to pursue the various securities law violations that have become apparent on an unprecedented scale during the current financial crisis.  We are particularly distressed that the SEC has not taken action to prosecute any major CFOs or CEOs for Sarbanes-Oxley violations, and look forward to the day that the SEC takes an active role in enforcing that critical piece of investor protection legislation.
Criminal traders and bankers tarnish the reputation of 99+% of financial institution employees who act according to the laws of the U.S.  If fraudulent activities are not punished with criminal convictions, opportunists will continue to abuse vulnerable institutions.  For the sake of honest bankers and the integrity of our financial markets, regulators need to set an example, remove anyone acting fraudulently and hold executives accountable where appropriate.  Otherwise, the entire industry’s reputation will be damaged and our markets will become less desirable in a highly competitive global marketplace.  Considering the importance of the financial markets to the U.S. economy from the perspectives of employment, growth and tax revenue, we believe that continuing to let criminals off the hook is an intolerable situation that must end.
Occupy the SEC is a group of concerned citizens, activists, and financial professionals with decades of collective experience working at many of the largest financial firms in the industry. Occupy the SEC filed a 325-page comment letter on the Volcker Rule NPR, which is available at

Member Perspective: Occupy the SEC, JPMorgan-Chase, & the Volcker Rule

Through its London office, JPMorgan-Chase (JPMC) hedged its overall position and did so with a big enough splash (the Whale) to call attention to itself.  It lost big and is still losing, but that fact is irrelevant.  The only significant question is whether this kind of activity was prohibited by the Volcker rule.  No, says the Comptroller of the Currency (OCC), one of the five federal regulators for the Volcker Rule.  Taking the OCC at its word, there is no story.
Alternatively, there is a story, which is that JPMC did violate the Volcker rule, perhaps not the law’s letter but certainly its intent.  That presumably is the position of the FDIC, which insures deposits at JPMC, and the Fed, which gives JPMC access to its discount window.

If they are correct and the OCC is mistaken, then the Volcker rule comes into question.  It is unlikely to be junked, so it will have to be tightened sufficiently so that the next time JPMC does something like this, the OCC will think there is a story.

That august group called Occupy the SEC (OSEC) aims to work by consensus. On the topic of JP Morgan’s loss, however, it is more like the Supreme Court: producing a majority opinion as well as one or more dissents along the way.   The majority opinion is that the Volcker rule has to be tightened.  The dissenting opinion, at least the one represented by the author of this comment, is that Congress would do better to junk the Volcker rule, start from scratch, and reenact the walls-of-separation familiar to us all from Glass-Steagall.  That minority view will be argued here.

Start with Glass-Steagall itself.  Its hallmark was its separation-of-powers doctrine, which in its case took the form of a separation of commercial banking from investment activities.   Imagine a commercial bank named Chase located on Main Street  and an investment bank named JPM (without the C) located on Wall Street.   Chase makes business loans, JPM makes investments.  JPM authorizes its London Whale to bet big, whether as hedging or not doesn’t matter.  What matters is that the Whale is incurring risks in the names of investors who know what they’re doing and give their consent.
Now what happens if it all goes South, as we like to say, and the investors lose $2 billion, maybe more, because of an investment strategy that was “flawed, complex, poorly executed, poorly vetted and poorly executed,” to use the words of Jamie Dimon at the recent Tampa shareholders‘ meeting.   What do investors do with an agent who says, “I can’t justify what happened” and that “unfortunately these wounds were self-inflicted.”

The answer seems obvious enough: you do what the district attorney would do with a suspect who confesses.   You bring Dimon before a court, present the confession as evidence, get the man convicted and then enjoy the spectacle of his execution as the next best thing to getting your money back.

But the shareholders did nothing of the sort.  They instead confirmed Dimon as CEO and chairman of the board, affirmed his salary at millions of dollars, and gave him a few verbal slaps-on-the-wrist.  The courageous Dimon made Ina Drew the fall-guy, but no one doubts that her severance package will be in the millions.  That Dimon lives to try it all again under a tightened Volcker rule should be sufficiently damning to condemn the rule itself.
So the trouble is with a rule the OCC thinks allowed Jamie Dimon to do what he did.  The trouble is also with a tightened version of that rule, for by the time the regulators get to writing it, Dimon will have gotten beyond his mea culpas and be supporting the new rule while lobbying for exceptions to it.

So what we need is a new two-part rule that allows Dimon to remain in place either at the head of an investment bank called JPMorgan or at the head of a commercial bank called Chase.  If he stays on Wall Street, then the investors will flee or they’ll throw him to the lions if be bets their money and loses it.  Or, under the aegis of a restored Glass-Steagall, Dimon opts to move over to Main Street and goes into the respectable business of dishing out commercial loans, in which case he most likely does not get in trouble.

A resurrection of Glass-Steagall would also allow sinners like Jamie Dimon to become honest people.  If Dimon bet big and lost, he would be able to say, “I bet the house (or houses, in his case) and lost.  It was my money, I knew what I was doing, and I have no regrets.”  Or the last sentence would read: “the money belonged to investors, I didn’t know what I was doing, and I have a lot of regrets because they just sacked me.”  Either way, we could all respect Jamie Dimon.  Right now, under the aegis of the Volcker rule, deep in the realm of legislated hypocrisy, the poor man is forced to lie every time he opens his mouth.

Bob Sullivan