How About Some Clawback at JPMorgan?
Summary Judgment is American Lawyer senior writer Susan Beck's regular opinion column for the Litigation Daily.
The U.S. Securities and Exchange Commission is finally showing a little swagger. In its recent $200 million settlement with JPMorgan Chase & Co., the agency got the bank to admit that it broke the law with its mishandling of some complex trades that lost the bank $6 billion. Even its touted settlement last month with hedge fund manager Philip Falcone didn't contain that kind of admission, as I pointed out at the time.
Still, the agency has a ways to go if it wants to strike a little fear into Wall Street. For one thing, the law that JPMorgan admitted to breaking was the relatively meek Section 13 of the Securities Act of 1934, some books-and-record-keeping rules that are hardly the SEC's most fearsome weapon. The SEC didn't even charge JPMorgan with negligence, let alone fraud, despite the bank's "woefully deficient accounting controls" described in the SEC's press release and its administrative order. And no top executive was charged.
Here's one way the SEC could act tougher: clawback. The Sarbanes-Oxley Act of 2002 gives the SEC the power to claw back bonuses and stock from a company's CEO and CFO if the company restates its financial results as a result of wrongdoing. That money is returned to the company. More specifically, the SEC can recoup any incentive compensation or stock that's issued in the 12 months following the date of the filing that was later restated.
So, in the case of JPMorgan, the SEC could claw back $10 million in stock compensation given to CEO Jamie Dimon in the one-year period after May 10, 2012, the date of JPMorgan's first quarter report that later had to be restated. (The same argument could be made for compensation given to former CFO Douglas Braunstein, but for simplicity's sake I'll just focus on Dimon.)
It's a simple law that doesn't require a showing that the CEO participated in the wrongdoing that led to the restatement. In a clawback case the SEC brought in 2009 against Maynard Jenkins, the former CEO of CSK Auto Corporation, the SEC vigorously argued that Jenkins could be forced to give back $4 million even if he wasn't involved in the wrongdoing. In a 2010 ruling, U.S District Judge G. Murray Snow in Phoenix agreed. Jenkins settled by agreeing to pay back $2.8 million.
So should the SEC claw back compensation from Dimon? There are a couple of arguments for why a clawback isn't the right move here. First, JPMorgan's board has already "punished" him for this trading fiasco: Dimon's compensation was cut in half for 2012, from $23 million in 2011 to $11.5 million. Second, the compensation he did receive wasn't artificially inflated by the errors corrected by the restatement: His compensation was set after the restatement. Third, the company corrected the error relatively quickly and cooperated with government investigators. (Kevin LaCroix of the D&O Diary makes a thoughtful argument why a clawback penalty that's divorced from wrongdoing is bad policy.)
These are decent arguments, but I still come out believing that the SEC should go after some clawback. This law is on the books for a reason: to make top executives more accountable. Under a plain reading of the law, it clearly could be applied here. If corporate leaders like Dimon knew that they ran a serious risk of losing serious money if their financial disclosure goes off the rails, they'd make darn sure they had tight controls. JPMorgan--where controls were "woefully deficient," according to the SEC--lost $6 billion on trades that went wrong and were covered up.
Even with his pay cut, Dimon still earned $11.5 million for 2012. Call me naive, but I think that's a lot of money. If the SEC forced Dimon to give back just a measly couple million, it would send a signal that it's serious about making top executives accountable.
But it doesn't look like that's going to happen. A JPMorgan spokesperson told The Wall Street Journal that the SEC has indicated it won't bring any actions against Dimon. The SEC declined to comment. JPMorgan's lawyers at Wilmer Cutler Pickering Hale and Dorr also declined to comment. I also reached out to the bank but didn't hear back.
"If you don't do it here, the question is why not," said Professor James Cox of Duke University School of Law about the clawback, adding that he thinks a clawback action against Dimon is warranted. "I can't think of an industry where [accurate financial reporting] is more important. You have so much exposure if you're not properly valuing risk." He added that bringing a Section 304 clawback action should be "part of the standard playbook" for the SEC when a company's wrongdoing leads to a restatement.
Maybe the SEC believes Dimon has been sufficiently held accountable, but I don't think that having to make do on $11.5 million is deterrent enough.