Before Thursday, the fallout from JPMorgan Chase's $6.2 billion losses from the "London Whale" trade seemed limited to a scuffed reputation and some uncertain future legal liability. A scathing Senate report about the trade has changed this calculus, with the nation's largest bank and its chief executives now possibly to be cast as defendants in lawsuits and against enforcement actions by regulators, legal scholars said.
"There seems to be plausible reason to believe that investors were misled," said Arthur Wilmarth, a banking law professor at The George Washington University.
Wilmarth and other legal scholars reached by HuffPost on Friday declined to make firm predictions about what might happen, but said investigations and fines, and possibly a large monetary settlement, seemed possible based on compelling evidence presented in the report that CEO Jamie Dimon and others withheld damaging information from investors and the public. Securities law requires publicly traded companies to disclose information that could "materially" change the stock price. Though the specifics are different, the conduct described in the report is similar to that that has led to regulators taking legal action in the past.
Barring a major change in approach by the Justice Department, a criminal prosecution is highly unlikely, the experts told HuffPost. Criminal cases require a higher burden of proof to convict -- meaning that they are harder to win -- and Attorney General Eric Holder recently suggested the agency's approach stems from a belief that some banks are too big to prosecute.
That leaves civil cases, in which penalties are measured in fines instead of jail sentences, as the most likely option. The most likely agency to bring such a case is the Securities and Exchange Commission, the federal agency set up to protect investors.
In contrast to the DOJ, the SEC has brought a slew of financial crisis-related lawsuits in recent years. How a London Whale case might shape up is unclear, but the type of misconduct described in the 300-page report invites comparison to cases accusing Goldman Sachs of betting against mortgage products even as the bank was peddling those same investments to clients, and accusing Citigroup for misleading investors about the harm bad investments were causing the bank's balance sheet.
JPMorgan is also the target of one of these types of cases stemming from the actions of traders at Bear Stearns, the investment bank it acquired in 2008. That case was brought last fall by the New York attorney general, and includes snippets of internal emails in which traders used crude language to describe what it was selling. One bond was a "sack of shit," a trader said.
The Senate report, which preceded a long, uncomfortable hearing on Friday featuring some of the same executives singled out as having deceived investors and regulators, includes similarly inflammatory language. JPMorgan traders reportedly called regulators from the Office of the Comptroller of the Currency "stupid," and others fretted in an email that "we are going to crash."
The report also includes evidence that senior-most executives, including Dimon, approved a change to how the bank calculated risk.
During Friday's hearing. Sen. Carl Levin (D-Mich.) said that the bank "changed pricing practices after losses piled up."
Sen. John McCain (R-Ariz.) said at the outset of the hearing that the London Whale trade was not the action of "rogue traders" and said that "superiors were well aware of their activities."
This type of evidence led the SEC to directly target Dimon and other top bankers, though the SEC has mostly avoided charging senior bank executives in financial crisis-related cases. With former bank lawyer Mary Jo White all but certain to take the reigns as the next commissioner, legal scholars said they are interested to see if the dynamic has changed. White is a respected former federal prosecutor, but spent the past decade defending banks and large companies, including JPMorgan.
"This is a test case for Mary Jo White," Wilmarth said.
Given her history with the bank, though, it is possible that she might recuse herself from any investigation.
Whatever happens, one certainty is that JPMorgan will fight hard against any legal charges, said Saule Omarova, a banking law professor at the University of North Carolina, and a former Treasury official. Omarova said that the financial industry has used the complexity of the financial markets as a shield against their complicity in any failed trade. That the Whale case involves something called a synthetic credit derivative underscores this point, she said.
"We made a bad business decision," she said, adopting the typical defense in one of these cases.
Another factor that makes these cases difficult for the government to win is the disparity of firepower between federal agencies and the financial industry, legal scholars said. The latter can afford to hire huge teams of experienced and talented lawyers that know how to raise just the kinds of doubts that can scuttle cases. Lawyers, in fact, just like Mary Jo White.