As an in-house attorney, listening to Jamie Dimon’s Capitol Hill testimony this week caused me no shortage of agita. How in the world does a sophisticated shop like JPMorgan engage in trading that “it didn’t fully understand?” We’re not talking about tranches of junk mortgages; this appears to be basic hedging that went awry to the tune of two billion dollars. Oh, and after this occurred, Dimon was re-upped as the top gun at JPMorgan and given a nice raise. I am sure that there are a raft of attorneys in-house and otherwise advising JPMorgan on this situation — and how to deal with it — but I am more interested in how these trades came to be approved in the first place.
I presume, without knowing, that JPMorgan’s traders have a gauntlet of approval processes to run before implementing new initiatives, and one of those processes surely involved legal approval, or at least legal “go ahead.” Legal surely reviewed the initiative or trades, or whatever the proper term of art may be, before passing it up to the sales floors, and this is the most troubling aspect for me. Assuming that the public testimony is accurate, (and yes, I know what happens when I assume), then the folks responsible for actually trading did not understand what they were doing. Wow. Just wow….
Of course, this is not an anomaly. A former senator from New Jersey recently “lost” 1.2 billion dollars in customer money when his firm went south. He stated publicly that it upset him greatly, and that he wished he knew where the money went. Just like Dimon’s public statements, it seems that losses of money in the billions of dollars in customer funds are worthy of simple “tut tuts” and “let’s move on.” To be fair, Dimon talked today of clawback abilities that could impact executive compensation and bonuses, but can the totality of any clawback initiatives really total two billion dollars?
Okay, enough of the polemicist rant. The point of this column is to look at the question of how the lawyers tasked with oversight of these companies failed. Or, if they did not fail in their duties, but were shouted down by the sales pressures in their industries, why we’re not hearing from them. It can’t be simply that they cherish their jobs. We all cherish the fact the we’re gainfully employed, but we also, as attorneys, are held to higher standards of care than even Dimon. For example, Dimon arguably doesn’t have an ethical or legal obligation to report when shenanigans occur — but the lawyers are held to both obligations. In fact, failure to adhere to these obligations can result in criminal charges, not for Dimon necessarily, but certainly for the errant attorney.
Further, the compliance attorneys have to meet certain specific reporting requirements quarter by quarter. Now, it’s also the case that in large entities like JPMorgan and MF Global, compliance counsel are separated in duties from other counsel by differing job descriptions. It may also be true that, in the case of the hedged bets that went sour for JPMorgan, outside counsel may have overreached in predictive assessments of possible outcomes. But no matter the cause of the situation, the fact remains that these losses started somewhere before the sales floor, and that “somewhere else” included the legal departments.
As in-house attorneys, we signed up to protect our respective companies, sometimes at all costs, including our jobs. It is not a duty taken lightly, but it is indeed a duty that can become a bit opaque if one does not remain diligent. The pressure to avoid being the “no” department, the pressure to assist in achieving revenue outlooks, and the pressure of helping to keep a company successful can cloud one’s judgment. When you realize that your advice may be getting murky, it is important to clear your head.
This clarity can come when an audit comes calling at your office door, or it can be self-motivated. Sometimes, the best way is for an audit to result in self-motivation. At the risk of sounding too much like a “red diaper doper baby,” I do wonder if the stakes can grow too large for one of us to allow failure, or to obstruct programs that we know are dangerous, risky, and too precipitous. I can’t honestly say that I wouldn’t mind having to face such a challenge, given the benefits that such a position entails. But I can say that when I am in such a position, I will try to uphold that standards of the profession for which I chose, and signed on to so long ago.
After two federal clerkships and several years as a litigator in law firms, David Mowry is happily ensconced as an in-house lawyer at a major technology company. He specializes in commercial leasing transactions, only sometimes misses litigation, and never regrets leaving firm life. You can reach him by email at [email protected].