JP Morgan Chase - Essay Example

? JPMorgan Chase of the of the The On May 10, J.P. Morgan Chase, which is the biggest bank in USA and also one of the most respected one for their high business standard, announced that they had lost more than $2.2 billion in trading of financial derivatives (Grey, 2013). The bank has reported that major cause behind this amount loss was the wrong investment decision made by its Chief Investment Office (CIO). This incident has forced the researcher to write this essay addressing various topics such as role of Commodities Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) in preventing high risk gamble in securities, different elements of valid contract, banking relationship between customers and banks, difference between intentional and negligent tort actions etc. In the last section the essay will shed light on software automation in online banking transaction. According to Securities and Exchange Commission (2013), its purpose of existence is to protect the interest of investors, facilitate capital formation and maintain a transparent and fare market. Research scholars such as Kamin and DeMarco (2010) and Hill (2010) have pointed out that SEC plays much larger role in comparison to CFTC when it comes to saving the interest of investors. Hence in this essay, the researcher will only focus on control mechanism of SEC in order to discourage banks and financial institutions from involving in high risk gambles in primary market and securities. SEC has created two divisions such as Division of Trading and Markets and Division of Investment Management in order to create a fair a transparent market and protect interest of investors (Securities and Exchange Commission, 2013). Trading and Market divisions monitor day to day activities of activities of security exchange houses, firms investing in securities, Municipal Securities Rulemaking Board (MSRB), Financial Industry Regulatory Authority (FInRA) etc (Securities and Exchange Commission, 2013). The division also work with Securities Investor Protection Corporation (SIPC) in order to provide cash to customers in those cases where customers file charges against fraudulent activities of firms. Key mechanisms of Trading and Market Division and Investment Management Division of SEC to protect interest of investors can be summarized as, 1- incorporating financial integrity program to mitigate conflict of interest between broker-dealers, 2- reviewing policies to identify and punish fraudulent activities of banks and other companies, 3- assisting the Commission to establish a fair security market and 4- monitoring the actions in commodity market, 5- reviewing the investment adviser filings and 6- assisting Commission to go for law enforcement against companies and banks falsifying the financial results (Securities and Exchange Commission, 2013). SEC has also investigative arm which conduct investigation on following charges; Omission or misrepresentation financial results or crucial security information Manipulation of market prices of securities Defrauding customer’s fund   Insider trading of market information On the basis of above mentioned guidelines, control measures and legal enforcement actions, SEC take actions in order to prevent high-risk gambles in securities in the field of banking operation and security exchange. Elements of contracts include various items such as, 1- An Offer- willingness of parities to enter into bargain, 2- An Acceptance- acceptance of condition mentioned in by both parties, Purpose- purpose of the contract must be legal, 4- Mutuality of Obligation- mutual understanding of the condition and obligation between parties, 5- Consideration- there must consideration of benefits among both promisor and promise and 6- Certainty of Subject Matter- all the conditions must be clearly defined in the contract so that everyone involved in the contract can understand it. However, the nature of contract between banks and customers is purely based on mutual trust and understanding. In most of the cases, there is no physical contract exists between banks and customers but it is the moral duty of banks to protect the interest of customers. In such context, act of Chief Investment Office (CIO) of J.P. Morgan Chase should be criticized. Aggarwal and Yousef (2000) have stated that banks should establish a financial filter framework in order to prevent its top officials from gambling with the customer’s money in security market whereas it is also responsibility of customers not to lend or credit beyond their capacity of repayment. There is significant difference exist between intentional torts when one party assaults other party and negligent torts when the incident occurs completely unintentionally like an accident. In intentional tort, one party uses its physical, financial and positional power to force or threaten other party while in negligent tort, there is no specific purpose and happens when one party fails to take “reasonable care” of other party which ultimately hurts the interest of other party (Winicov, 2013). Breach of duty of one party can create harm for other party and in this case, it can be classified as negligent tort. To understand the tort action in terms of “Interference with Contractual Relations and Participating in a Breach of Fiduciary duty”, one needs to understand the meaning of the term fiduciary duty. According to Ribstein (2005), fiduciary duties arise in those cases where parties involve in services which need entrustment of property or power. In such context, it is the fiduciary duty of trustee to protect the investment, property of entrustor. Breach of fiduciary duty occurs when trustee fails protect the property of entrustor. As the above mentioned statement is case of breach of contract hence it can be classified as negligent tort. Noticeable fact is that, in case of investment loss of J.P. Morgan Chase, Chief Investment Office (CIO) has not intentionally loss the investment money rather the money had been lost due to lack of forecasting ability of the bank to assess the volatility of security market. In such context, the bank that I have chosen behave as JP Morgan then it will be a challenge for me to prevent such tort action. Harsh fact is that although it is theoretically advisable for banks not to indulge in securities but in real business world, a bank has to rely on security market in order to provide better return to customers (Rubin, 2010). However, there is significant difference between risk appetites for banks to get better return from security market and gambling on future & commodity market. Hence, I will suggest my financial officials to make careful analysis of the market situation before deciding to invest money of customers and in required situation, I will hire external independent auditor to audit the financial result of the bank. Despite this control measures, if any official will found for negligent tort in terms of gambling with the investment of customers then I will establish an internal investigation bench which will investigate the tort action of the official. In extreme cases, I will take help of SEC to improve the situation. Banks have taken number of measures such setting privacy firewall so that hackers and cyber criminals face difficult in accessing the account information of users, asking voice and eye retina confirmation of users before proceeding online transactions, incorporating special characters in password so that hackers do not copy the password easily etc in order to protect the online transaction which occurs through automation. Many banks use frequently changeable passwords in order to protect the online account of users while some banks has given the opportunity to customers customize the privacy setting of online account. Sending the Know Your Customer (KYC), knowledge brochure of prevention measures against cyber criminals and fraudsters through e-mail to customers are the common techniques that banks use to protect the security of online banking transactions. Reference Aggarwal, R. K., & Yousef, T. (2000). Islamic Banks and investment financing. Journal of Money, Credit and Banking, 32(1), 93-120. Grey, B. (2013). Senate report documents fraud and lawbreaking by JPMorgan Chase. Retrieved from http://www.wsws.org/en/articles/2013/03/16/bank-m16.html. Hill, C. A. (2010). Who were the villains in the subprime crisis, and why it matters. 4 Entrepreneurial Business Law Journals, 14, 323-50. Kamin, S. B., & DeMarco, L. P. (2010). How did a domestic housing slump turn into a global financial crisis? Working Paper No. 994, International Finance Discussion Papers, Board of Governors of the Federal Reserve System. Ribstein, L. E. (2005). Fencing fiduciary duties. Retrieved from http://www.bu.edu/law/central/jd/organizations/journals/bulr/documents/RIBSTEIN.pdf. Rubin, R. E. (2010). Testimony before the financial crisis inquiry commission. Retrieved from http://fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2010-0408-Rubin.pdf. Securities and Exchange Commission. (2013). The investor's advocate: how the SEC protects investors, maintains market integrity, and facilitates capital formation. Retrieved from http://www.sec.gov/about/whatwedo.shtml. Winicov, J. P. (2013). Intentional torts vs. negligent torts. Retrieved from http://www.johnwinicov.com/lawyer-attorney-2063126.html. Read More