JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

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(2) Section 17(a) of the Securities Act of 1933
In addition to Rule 10b-5, Section 17(a) of the Securities Act of 1933 forbids issuers from
making misleading statements in connection with the offer or sale of securities. The courts have
determined that Rule 10b-5 and Section 17(a) “prohibit essentially the same type of conduct.” 1493
Specifically, Section 17(a) makes it unlawful “in the offer or sale of any securities … (1) to
employ any device, scheme, or artifice to defraud; (2) to obtain money or property by means of
any untrue statement of a material fact or any omission to state a material fact necessary to make
the statement made not misleading; or (3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or deceit upon the purchaser.” 1494 It applies
to “any fraudulent scheme in an offer or sale of securities, whether in the course of an initial
distribution or in the course of ordinary market trading.” 1495 Unlike Rule 10b-5, however,
Sections 17(a)(2) and 17(a)(3) do not require a finding of scienter. 1496
C. Disclosures and Key Omissions Raising Concerns
JPMorgan Chase’s statements to investors, analysts, and the public in its press
statements, earnings calls, and securities filings raise multiple questions about whether the bank
met its obligations to disclose accurate material information about the Synthetic Credit Portfolio
and the activities of its Chief Investment Office in 2012. Issues of concern involve primarily the
April 2012 public disclosures which included: (1) mischaracterizing the involvement of the
bank’s risk managers in SCP positions; (2) mischaracterizing the SCP as “fully transparent to the
regulators;” (3) mischaracterizing SCP decisions as “made on a very long-term basis;” (4)
mischaracterizing the SCP as a hedge; (5) asserting the SCP whale trades would be allowed
under the Volcker Rule; and (6) omitting disclosure of a key VaR model change at the CIO. The
mischaracterization of the SCP as a hedge was repeated again publicly in May 2012.
(1) Mischaracterizing the Involvement of Firmwide Risk Managers
On April 13, 2012, Mr. Braunstein, the bank’s Chief Financial Officer, speaking on
behalf of JPMorgan Chase on an earnings call, stated that “[a]ll of those positions are put on
confuses expected with realized benefits. [The CEO] may have thought there was a chance the situation regarding
the two key products would right itself. If so, the benefits of concealment might exceed the costs.”).
1493 In the Matter of Leaddog Capital Markets, LLC, F/K/A Leaddog Capital Partners, Inc., Securities Exchange Act
Rel. No. 468 (Sept. 14, 2012), at *28 (citing United States v. Naftalin, 441 U.S. 768, 778 (1979); SEC v. Pimco
Advisors Fund Mgmt. LLC, 341 F. Supp. 2d 454, 469 (S.D.N.Y. 2004)).
1494 15 U.S.C. § 77q(a) (1976).
1495 U.S. v. Naftalin, 441 U.S. 768, 778 (1979); see also S.E.C. v. Am. Commodity Exch., Inc., 546 F.2d 1361, 1366
(10 th Cir. 1976) (“Because 17(a) applies to “offer[s] or sale[s] … actual sales [are] not essential for a Section 17(a)
claim.”); see also Donna M. Nagy et al., Securities Litigation and Enforcement, Cases and Materials, 3d Ed., at 338
(“Section 17(a) provides the SEC with a powerful litigation weapon. Not only can liability be imposed on someone
who was merely careless (under Sections 17(a)(2) and (a)(3)), whether in the context of an initial offering or in
secondary market trading.”).
1496 Aaron v. SEC, 446 U.S. 680, at 697, 701-02 (1980); S.E.C. v. Pimco Advisors Fund Management LLC, 341
F.Supp.2d 454, 469 (S.D.N.Y. 2004) (internal citations omitted) (“To establish a violation of Section 17(a), the SEC
must demonstrate essentially the same elements required by a claim under Exchange Act Section 10(b) and Rule
10b-5 thereunder, although no showing of scienter is required for the SEC to obtain an injunction under subsections
(a)(2) or (a)(3) of Section 17(a).”).