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

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the Firm’s portfolios, changes in market conditions and dynamics, improvements in the Firm’s
modeling techniques, systems capabilities, and other factors.” 1639
Together, the 10-Q statements do not plainly disclose that the CIO had replaced its old
VaR model with a new one in January 2012, used that new model to calculate a much lower VaR
for the CIO in the bank’s April 8-K filing, and then decided to stop using the new model and
reinstate the prior model to calculate the CIO’s VaR total for the May 10-Q filing. In addition,
the bank omitted disclosing in its 10-Q filing that the bank had determined the original first
quarter VaR was inaccurate and had understated the SCP risk by a significant amount. The bank
also omitted any mention of the operational problems it had discovered in connection with the
discarded VaR model. CIO management had discovered those problems only a few days after
1640
the April 8-K was filed, but waited nearly a month to publicly correct the CIO’s VaR results.
On May 10, 2012, the day the 10-Q report was filed, JPMorgan Chase also held a
“business update call” with analysts, investors, the media, and others. At the outset of the call,
Mr. Dimon explained orally what wasn’t explained in the 10-Q filing: “In the first quarter, we
implemented a new VAR model, which we now deemed inadequate. And we went back to the
old one, which had been used for the prior several years, which we deemed to be more
adequate.” In addition, when asked why the bank had made the VaR model change “in the first
place,” Mr. Dimon responded: “There are constant changes and updates to models, always
1641
trying to get them better than they were before. That is an ongoing procedure.” In both
explanations, Mr. Dimon omitted any mention of the fact that the CIO VaR model adopted in
January 2012 was not just “inadequate,” but had been determined by the bank to have
understated the risk of loss by the SCP. The January VaR model had indicated, for example, that
the most money the CIO could lose in a day was $67 million, yet on March 30, 2012, the SCP
reported internally a daily loss of $319 million, four times greater than the VaR had predicted.
On April 10, 2012, the SCP reported internally a daily loss of $415 million, a nonpublic figure
five times larger than the original VaR. The developer of the new CIO VaR model told the
Subcommittee that the loss of $415 million meant that the CIO VaR “model [wa]s wrong.” 1642
Mr. Dimon stated during the May 10 call: “You should assume that we try to keep our
readers update[d] about what we know and when we know it and it’s just a constant practice of
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the company.” When making this statement, Mr. Dimon did not disclose that bank
management had been aware of the significant impact of CIO’s VaR model change in January,
but did not tell investors about the change. That information could and should have been, but
1639
5/10/2012 JPMorgan Chase & Co., Form 10-Q, at 74,
http://investor.shareholder.com/jpmorganchase/secfiling.cfm?filingID=19617-12-213.
1640
See 4/18/2012 email from Keith Stephan, CIO, to Achilles Macris, CIO, and others, “CIO VaR,” JPM-CIO-PSI
0001205 (“FYI-we discovered an issue related to the VAR market data used in the calculation …. This means our
reported standalone var for the five business days in the period 10-16 th April was understated by apprx $10
[million].”). For more information, see Chapter V.
1641
5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 14, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf
(in response to this question by an analyst: “And what caused you to change the VaR model in
the first place? I mean you had something that was working and you changed it.”).
1642
Subcommittee interview of Patrick Hagan, CIO (2/7/2013).
1643
5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 4, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf.