You would think that a fine of almost $1 billion would be the most painful part of a corporate settlement with regulators. (Yes, a billion with a ‘b.’) How can a penalty that large not be the whole lesson?
Like many big changes, the real story is in an important footnote. In an agreement to pay fines related to its 2012 “London Whale” trading problems, JPMorgan Chase was required by the U.S. Securities & Exchange Commission (SEC) to do something almost no other company has had to do at this stage in a corporate drama: It had to admit guilt.
As The Wall Street Journal said under the heading, “An Historic Admission from J.P. Morgan:”
The bank’s mea culpa is only the second such acknowledgement of wrongdoing — and the first by a major bank … since SEC Chairman Mary Jo White in June stunned defense lawyers by announcing that the agency was axing the standard boilerplate of allowing firms to settle allegations without admitting or denying wrongdoing. In certain cases, she said, firms and individuals will in future have to admit wrongdoing or fight the case in court.
With the first major bank now being forced to adhere, we know the SEC means business. And other regulators, in the U.S. and abroad, may be encouraged to take a harder line as well. In essence, the policy fundamentally changes the landscape of consequences for any company that uses the U.S. capital markets.
First, the risk of civil actions will increase with the admission. According to industry newsletter Fierce Finance, one big reason that companies have long resisted admitting guilt is because they fear that private suits would proliferate. This is a familiar problem for anyone who has ever dealt with a corporate crisis.
The issue is whether there will be stepped-up costs in the form of private litigation that flows from the bank’s admission of guilt …(as JPMorgan) will likely agree that it failed to competently supervise the trading desk in London that carried out the controversial trades and alleged cover-up.
Second, the clarity of “guilt” will make the impact on reputation more profound and the recovery potentially more difficult. Even though many corporate audiences already make up their minds about a company’s guilt or innocence without benefit of a confession, the ability to settle an investigation and pay a fine, without saying “we failed,” has been considered a communications advantage. Forcing a corporate admission is likely to mean a clearer break with public expectations.
The new policy seems to be in response to criticism the Commission received over its perceived failure to prevent or at least check the enormity of the recent financial crisis. It also reflects a nagging public suspicion that enforcement is just not sufficiently tough on companies. Simply paying even a very big fine may not be painful enough to make companies think twice before violating rules again, many believe.
Yet, not having to say “guilty as charged” in an official proceeding has previously made companies more willing to communicate about a problem early in the cycle, and talk about reforms or improvements. This shift in SEC policy may mean companies are going to be less likely to come forward voluntarily when rules have been broken. Admissions of guilt also will make follow-on litigation more likely and potentially more costly. The collateral damage will be felt as the boardroom door is slammed shut, and full and fast corporate communications are stifled.
It is ironic then that pursuing a get-tough policy with companies and demanding declarations of guilt may ultimately make the SEC’s job tougher and translate into less disclosure to various corporate stakeholders. That, indeed, would be an unintended consequence that no one would endorse.