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Running head: JPMORGAN CHASE, ASSIGN 2, C GARCIA, FALL 2013 1 Banking Business Ethics and the Consumer Relationship By Claire Garcia, Strayer Student Assignment 2: JPMorgan Chase, Week 8 LEG 100, fall 2013, Professor Carol Stoner

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Page 1: LEG 100 Assign 2 JPMorgan Chase

Running head: JPMORGAN CHASE, ASSIGN 2, C GARCIA, FALL 2013 1

Banking Business Ethics and the Consumer Relationship

By Claire Garcia, Strayer Student

Assignment 2: JPMorgan Chase, Week 8

LEG 100, fall 2013, Professor Carol Stoner

Page 2: LEG 100 Assign 2 JPMorgan Chase

JPMORGAN CHASE, ASSIGN 2, C GARCIA, FALL 2013 2

JPMorgan Chase and the “London Whale”

In 2012, the investigation into massive losses and falsified financial statements put CEO Jamie

Dimon and JPMorgan Chase under the microscope. Who is the London whale? UK-based Bruno

Iksil earned the name London whale for his big position regarding hedge fundsi and their

relationship to the credit derivativesii indexesiii. The discovery of the activities related to the

losses resulted in $920 million in fines for JPMorgan Chase. Accused of hiding the losses to

falsify the banks success

earned CEO Jamie Dimon

a myriad of questions to

answer regarding the

company’s risk

management policies and

procedures. Found to be in violation of the Volcker Ruleiv, JPMorgan Chase needed to take

responsibility for hiding the losses on their financial statements and taking large risks with

investor money. The investigation involved a number of agencies, committees, and sub-

committees. These agencies/committees included the Federal Reserve, the OCC (Office of the

Comptroller of Currency), the SEC, the CFTC (Commodity Futures Trading Commission), the

SIFMA (Securities Industry and Financial Markets Administration), the ICBA (Independent

Community Bankers of America), and the FDIC (Federal Deposit Insurance Corporation) to

name a few. The complication in determining wrongdoing lies in the definition and difference

between the words speculationv and hedgevi in regards to the invested funds. CEO Jamie Dimon

accepted responsibility for the errors in judgment and reporting, and JPMorgan Chase has

initiated lawsuits against the “London Whale” and his supervisor for their involvement.

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JPMORGAN CHASE, ASSIGN 2, C GARCIA, FALL 2013 3

Banking Business Ethics and the Consumer Relationship

Safeguards are in place to protect the consumer from the business of big banking. The

SEC and CFTC take action to investigate wrongdoing in the financial industry. The consumer

counts on these agencies to enforce the ethical behavior and to uphold the financial contracts that

bind the consumer and the financial world. In the case of wrongdoing, it is either intentional or

negligent. Barclay bank has made similar errors to JPMorgan Chase, and has prevailed to

become a very successful financial institution following their investigations and corrective

actions. With the advent of additional modes of banking, primarily mobile and electronic, the

banking industry has had to place additional safe guards to protect the consumer and the access

to servers that house the financial information.

Q1: SEC and CFTC Procedures for Investigation of Wrongdoing

The SECvii (Securities and Exchange Commission) and the CFTCviii (Commodities

Futures Trading Commission) hold the financial world accountable for their financial reporting

and actions. There are several Acts in place to safeguard the actions of the financial world.

These Acts include the Securities Act of 1933, the Securities Exchange Act of 1934, the Dodd-

Frank Wall Street Reform and Consumer Protection Act, the Commodity Exchange Act, and the

Sarbanes-Oxley Act of 2002 to name a few. The addition of the Sarbanes-Oxley Act of 2002

greatly increased the responsibility of corporate lawyers, CEO’s, CIO’s, and CFO’s to be more

accountable for the day to day decisions they make that can be fraudulent and/or impact

investors. In the event of an investigation, the Enforcement Division assists the Commission by

recommending the investigation and prosecution of violators of the laws the Commission

upholds. The Enforcement Division prosecutes the violators on behalf of the SEC. The privately

conducted investigations are an in-depth look into the each case through witness statements,

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JPMORGAN CHASE, ASSIGN 2, C GARCIA, FALL 2013 4

financial statements, review of all records and trading data, and if necessary subpoena of

additional parties that may have pertinent information. The result from the investigation will

result in either civilix or administrative actionx for the violating party.

Q2: The Banking Relationship with the Consumer

The relationship between the consumer and a financial institution is a contractual obligation to

fulfill the agreed upon financial relationship. For example, the purchase of an automobile is a

financial contractxi for the repayment of a loan given by a financial institution to the consumer

facilitated by a seller (dealership or individual). Contracts begin with an offerxii for the terms of

the loan. In this case, the sales person and the financial officer at the car dealership are often

acting as an agentxiii on behalf of the financial institution (the principalxiv) for the negotiation,

presentation, and acceptance of the offer. The acceptancexv of the offer will initiate the

contractual relationship between the financial institution and the consumer. Upon the formation

of the valid contract, the dealership and financial institution offer the considerationxvi, in this case

the automobile, to the consumer. The financial institution and the dealership must comply with

fair lending lawsxvii in their negotiation of contracts with consumers. The dealership/automobile

manufacturer must also comply with any written or otherwise expressed warrantiesxviii for the

vehicle purchased by the consumer. Assuming the consumer had the appropriate capacityxix to

accept the offer and initiate the contract, the consumer is then responsible to comply with the

conditions of the contract. The same conditions that apply to the purchase of an automobile are

applicable to the contractual agreement in other financial situations.

Q3: Comparison and Contrast between Intentional and Negligent Tort Actions. To

distinguish the difference between an intentional or negligentxx act, you must first examine the

intentxxi of the person committing the act. Did the accused party (company or individual) have

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the intent to do wrongxxii? Regarding the JPMorgan Chase banking errors, there is some question

concerning the intent of the “London whale” that was involved in the investment of large sums

of money. The difficulty in determining intent in this case is the definitio n of the financial terms

used by the parties involved. Before determining the intent in this case, the investigating

agencies must first define the actions of the accused parties. What did they intend to do with the

money? Did they properly express the associated risks to the investing parties? Was it an

intentional or negligent risk to take with the invested funds? If it is a combination of actions,

which were intentional and which were negligent? To initiate a tortxxiii lawsuit, the prosecutor

first needs to determine the type of action to bring against the defendant. An in-depth

investigation into the different agency relationships (third party) and their contracts must also be

performed to determine who to prosecute and for what action. Examples of intentional tort

actions include batteryxxiv, assaultxxv, false imprisonmentxxvi, intentional infliction of emotional

distressxxvii, defamationxxviii, invasion of privacyxxix, trespassxxx, nuisancexxxi, conversionxxxii,

fraudulent misrepresentation (fraud)xxxiii, disparagementxxxiv, malicious prosecutionxxxv,

interference with contractual relationsxxxvi, interference with prospective business advantagexxxvii,

and bad faithxxxviii. Examples of negligent tort actions include legal dutyxxxix (rescue, landlord,

landowner), breach of duty (res ispa loquiturxl), and include the concepts of assumption of riskxli,

contributoryxlii or comparative negligencexliii, and the economic loss rulexliv.

Q4: Barclay bank and the “Interference with Contractual Relations and Participating

in a Breach of Fiduciary duty.” CEO Bob Diamond, Barclay Bank, had the dream of creating a

model of a universal bank. Considered, like CEO Jamie Dimon of JPMorgan Chase, one of the

champion architects of this universal model of a bank. The result of the Libor scandal at Barclay

bank was fines of $453 million. Liborxlv is an acronym that stands for “London interbank offered

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rate.” The Libor rate effects borrowers worldwide. There were two major violations involving

the Libor rate and Barclay bank. The first was the traders submitting false reports, swelling their

profits, in an effort to make the bank look much more successful than they actually were. The

second was submitting false Libor rates to make themselves look better. The fraudulent

submissions directly affected the amount the bank could borrow for its loans, and illegally

increased the bank’s competitive advantage in the marketplace. The actions of Barclay bank

both interfered with contractual relations with other financial institutions and constituted a

breach of fiduciary dutyxlvi. CEO Bob Diamond stepped down from his duties, but respected as a

pioneer in the banking industry. The banking scandal did not affect the banks’ ability to be

successful, as Barclay is consistently amongst the top 10 banks in the world, along with

JPMorgan Chase. (See Table 1)

Q5: Protecting Automated Banking. The sophistication of the consumer’s ability to

access their banking information online is and has been increasing rapidly. This presents the

banking industry with a new challenge in securing their customer’s financial information. There

are some security risks, primarily created by humans that the bank cannot avoid. For example, if

a person writes their user name, password, and answers to their security questions on a piece of

paper and leaves it anywhere anyone can access it, this constitutes a fatal security risk that no

bank can protect. Otherwise, banks have created several security layers in an attempt to protect

the consumer from an electronic security breach. Security issues can be intentional or accidental,

and human or non-human generated. (See Table 2) When speaking of electronic banking there

are two primary types of consumer interaction, e-commerce and m-commerce. E-commerce is

connection to the bank through the internet from a non-mobile device. M-commerce is the

connection to the bank through any mobile device, such as a cellular phone. Though there are

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many similarities to the security risks, the formatting and security precautions for each type of

commerce require a specialized expertise to protect the connection and information. Security

measures include but are not limited to security policy, host security, network security,

organizational security, and legal security. There are methods to prevent users from forgetting

their passwords. Hash Visualization is the use of visual images for authentication. The idea is

that people can remember images better than a strong or complicated password. A five-step

approach to authentication reduces some of the vulnerabilities. The five-step approach includes:

step 1) the user entering an access ID for their account, step 2) the user enters a password (some

sites have specific rules for the complexity of the password), steps 3&4) the user answers

security questions that were previously chosen and answered by the user, and step 5) the user

identifies a picture that they have previously chosen and associated with their account. As

security measures increase, it may become more cumbersome for the user to access their

information. Electronic security measures are a continuous process that involves the consistent

study of new threats to the online environment.

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References

Bagley (2013) Managers and the Legal Environment (7th Edition)

Lawrence/Weber (2011) Business and Society: Stakeholders, Ethics, Public Policy (13 th Edition)

French, Aaron M., “A case study on E-Banking security – When security becomes too

sophisticated for the user to access their information.” Journal of Internet Banking and

Commerce. Aug2012, Vol. 17 Issue 2, p1-14.

“Barclay Bank’s acquisition of ING Direct UK highlights the continuing impact of the banking

crisis.” MarketWatch: Financial Services. Nov2012, Vol. 12, Issue 11, p41-41

Tully, Shawn & Adamo Marilyn, “The Death of Bob Diamond’s Dream.” Fortune. 8/31/2012,

Vol. 166, Issue 3, p78-83

Touryalai, Halah, “The World’s 29 Too Big to Fail Banks, JPMorgan at the Top.”

www.forbes.com 11/11/2013

“The Alphabet Soup of Credit Derivative Indexes.” www.investopedia.com

Cory, Peter & Hamilton, Jesse, “The Five-Letter Word No One Can Define.” Bloomberg

BusinessWeek. 11/11/2013, Issue 4354, p36-37

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“Bank Regulators Face Tough Questioning Over JPMorgan Chase.” Pratt’s Bank Law &

Regulatory Report, 2012, Vol. 18, Issue 7, p14-15

“Senate Investigation Says JPMorgan Chase Ignored Growing Trade Risks and Hid Losses From

Investors and Regulators.” International Business Times, 20130315

“London Whale.” Financial Times Lexicon, www.lexicon.ft.com

“How Investigations Work.” Securities and Exchange Commission, www.sec.gov

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Table 1

Forbes Magazine 11/11/2013

“The World’s 29 Too Big to Fail Banks, JPMorgan at the Top.”

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Table 2

A Case Study on E-Banking Security – When Security Becomes Too Sophistiated for the

User to Access Their Information“

Source Human/Non-Human Accidental Intentional

Internal Human Acts by employees Acts by employees

Accidental entry bad data

Intentional ly destroy data by

employee

Accidental destruction of data by

employees

Intentional entry of bad data by

employee

Adminis trative procedures

Unauthorized access by

employees

Weak/ineffective phys ica l control

Non-Human Mechanica l and Electrica l Mechanica l and Electrica l

Program Problems Program Problems

External Human Competitors Hackers

Media Denia l of Service Attacks

Socia l Engineering

Non-Human Fire Computer Virus

Earth Worms

Wind Trojan

Water Spyware

Internal Human Pol icies and Procedures Pol icies and Procedures

Securi ty Awareness Tra ining Audit procedures s trengthened

Employee education Monitor Computer Usage

Ethics tra ining Reporting Violations encouraged

Ethics tra ining

Non-Human Update Software Company provided software only

External Human Securi ty Awareness Tra ining Use of passwords

No outs ide BBS connections Encryption

Authenti fication (images , text,

etc.)

Securi ty Questions

Auto terminal/account log off

Insta l l and Properly configure

fi rewal l

SECURITY METHODS

SECURITY THREATS

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Endnotes

i Hedge Fund: (definition courtesy of www.investopedia.com) “An aggressively managed portfolio of

investments that uses advanced investment strategies such as leverage, long, short and derivative position in both

domestic and international markets with the goal of generating high returns (either in an absolute sense or over a

specified market benchmark). Legally, hedge funds are most often set up as private investment partnerships that are

open to a limited number of investors and require a very large initial minimum investment. Investments in hedge

funds are illiquid as they often require investors keep their money in the fund for at least one year.” ii Credit Derivative: (definition courtesy of www.investopedia.com) “Privately held negotiable bilateral

contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward

contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private investors or

governments).” iii Credit Derivative Indexes: The major indexes are CDX, ABX, CMBX and LCDX. The indexes are rated

by their “investment grade”. HY (high yield), HVOL (high volatility), XO (crossover), EM (emerging market).

For example if listed as CDX.NA.HY, it would indicate that the CDX is a North American (NA), high yield (HY)

index. iv Volcker Rule: (definition courtesy of www.investopedia.com) “Named after former Federal Reserve

Chairman Paul Volcker, the Volcker rule basically stops banks from doing their normal business (installments loans,

residential mortgages, equity credit loans, deposit services) as well as trading on their own behalf. The rule was

introduced following the recession of 2008, to control the risk associated with the financial sector…..The Volcker

rule aims to protect individuals by creating a more transparent financial framework which can be regulated with

greater ease.” v Speculation: (definition courtesy of www.investopedia.com) “The act of trading in an asset, or conducting

a financial transaction, that has a s ignificant risk of losing most or all of the initial outlay, in expectation of a

substantial gain….While it is often confused with gambling, the key difference is that speculation is generally

tantamount to taking a calculated risk and is not dependent on pure chance, whereas gambling depends on totally

random outcomes or chance.” vi Hedge: (definition courtesy of www.investopedia.com) “Making an investment to reduce the risk of

adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related

security, such as a futures contract.” vii SEC (Securities and Exchange Commission): The U.S. federal government agency whose mission is to

protect stockholders’ rights by making sure that stock markets are run fairly and that investment information is fully

disclosed. viii CFTC (Commodities Futures Trading Commission): (definition courtesy of www.investopedia.com)

“An independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. The

CFTC regulates the commodity futures and options markets. Its goals include the promotion of competitive and

efficient futures markets and the protection of investor against manipulation, abusive trade practices and fraud.” ix Civil Action: (courtesy of www.sec.gov) The Commission files a complaint with a U.S. District Court

and asks the courts for a sanction or remedy. Often the Commission asks for a court order, called and injunction that

prohibits any further acts or practices that violate the law or Commission rules. x Administrative Action: (courtesy of www.sec.gov) The Commission can seek a variety of sanctions

through the administrative proceeding process. Administrative proceedings differ from civil court action in that they

are heard by an administrative law judge (ALJ) who is independent of the Commission. xi Contract: a legally enforceable promise or set of promises xii Offer: a manifestation of willingness to enter into a bargain that justifies another person in understanding

that his or her assent will conclude the bargain. xiii Agent: a person who manages a task delegated by another (the principal) and exercises whatever

discretion is given to the agent by the principal xiv Principal: A person who delegates a portion of his or her tasks to another person who represents the

principal as an agent xv Acceptance: response by the person receiving the offer that indicates willingness to enter into the

agreement proposed in the offer xvi Consideration: a thing of value (money, services, an object, a promise, a forbearance, or giving up the

right to do something) exchanged in a contract

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xvii Fair Lending Laws: laws that prohibit discrimination in lending practices xviii Expressed Warranty: An explicit guarantee by the seller that the goods purchased by a buyer will have

certain qualities xix Capacity: a legal term that refers to a person’s ability to understand the nature and effect of the

agreement xx Negligence: a breach of the requirement that a person act with the care a reasonable person would use in

the same circumstances xxi Intent: the actual, subjective desire to cause the consequences of an act, or the belief that the

consequences are substantially certain to result from it xxii Intent to do wrong: subjective intent or desire to do wrong or intent to take action substantially certain

to cause a wrong to occur xxiii Tort: a civil wrong causing injury to a person, his or her property, or certain economic relationships xxiv Battery: the intention, non-consensual harmful of offensive contact with an individual’s body or with

those things in contact with or closely connected with it xxv Assault: the intent to create a well-grounded apprehension of an immediate harmful or offensive contact.

Generally, assault also requires some act (such as a threatening gesture) and the ability to follow through

immediately with the battery xxvi False Imprisonment: the confinement of an individual without that individual’s consent and without

lawful authority xxvii Intentional infliction of emotional distress: Outrageous conduct by the individual inflicting the distress;

intention to cause, or reckless disregard of the probability of causing, emotional distress; severe emotional suffering;

and actual and proximate (or legal) causation of the emotional distress xxviii Defamation: the intentional communication to a third party of an untrue statement of fact that injures

the plaintiff’s reputation or good name by exposing the plaintiff to hatred, ridicule, or contempt xxix Invasion of Privacy: prying or intrusion that would be objectionable or offensive to a reasonable person,

including eavesdropping, rifling through files on has no authorization to see, public discloser of private facts, or

unauthorized use of an individual’s picture in an advertisement or article with which that person has no connection xxx Trespass: the intentional invasion of property (real or personal) xxxi Nuisance: a things or activity that unreasonably and substantially interferes with an owner’s use and

enjoyment of owner’s property xxxii Conversion: the exercise of dominion and control over the person property, rather than the real property

(land), of another. xxxiii Fraudulent Misrepresentation: deceit; intentionally misleading by making material misrepresentations

of fact that the plaintiff relied on that cause injury to the plaintiff xxxiv Disparagement: untrue statements derogatory to the quality or ownership of a plaintiffs goods or

services, that the defendant knows are false, or to the truth of which the defendant is consciously in different xxxv Malicious Prosecution: a plaintiff can successfully sue for the tort of malicious prosecution if he or she

shows that a prior proceeding was instituted against him or her maliciously and without probably cause of factual

basis xxxvi Interference with Contractual Relations: a defendant intentionally induces another to breach a contract

with the plaintiff xxxvii Interference with Prospective Business Advantage: intentional interference by the defendant with a

business relationship the plaintiff seeks to develop, which interference causes loss to the plaintiff xxxviii Bad Faith: a breach of duty to act in good faith xxxix Legal Duty: the requirement to act reasonable under the circumstances to avoid harming another

person xl Res ipsa loquitur (the thing speaks for itself): the doctrine that allows a plaintiff to prove breach and

causation indirectly xli Assumption of Risk: the expressed or implied consent by plaintiff to defendant to take the chance of

injury from a known and appreciated risk xlii Contributory Negligence: plaintiff was negligent in some manner when injured by defendant xliii Comparative Negligence: the doctrine by which courts decide amount of award to be given a plaintiff

based on the amount (percentage) of negligence plaintiff demonstrated when injured by defen dant xliv Economic Loss Rule: a common law doctrine that bars a plaintiff who is in privity of contract with the

defendant or who has entered into a commercial transaction involved the defendant from bringing a lawsuit for

negligence based solely on economic losses.

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xlv LIBOR: (definition courtesy of www.investopedia.com) “An interest rate at which banks can borrow

funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by

the British Banker’s Association. The LIBOR is derived from a filtered average of the world’s most creditworthy

banks’ interbank deposit rates for larger loans with maturities between overnight and one full year.” xlvi Fiduciary Duty: the obligation of a trustee or other fiduciary to act for the benefit of the other party