JPMorgan Chase’s scandal in the summer of 2012 revealed the underhand dealings that involve the manipulation of financial reports so as to create a picture that is different from the real situation of the company’s finances. The company was found by government investigators to have devised manipulative schemes that changed or modified money-losing power plants into incredible profit centers. On the same note, one of the senior executives was found to have given misleading and false statements under oath. Of particular concern, however, is the fact that the trading losses to the tune of $5.8 billion from investment decisions by the Chief Investment Office (CIO) was concealed by the falsified first quarter reports provided to the Securities and Exchange Commission (SEC). Nevertheless, the SEC and the CFTC have a role to prevent fraud especially with regard to high-risk gambles. SEC requires all public companies to disclose all meaningful financial information, as well as any other useful information thereby allowing investors to make their own judgments on whether to hold, sell or buy a certain security (Fleuriet, 2008). This allows investors to make sound decisions on their investment thereby resulting in an active, transparent and efficient capital market that enhances capital formation, crucial to the nation’s economy (Rosenbaum & Joshua, 2009). CFTC, on the other hand, is charged with the responsibility of regulating commodity futures trading, as well as options contracts in the U.S and takes legal action against entities that are suspected of fraudulently or illegally selling options or commodity futures (Rosenbaum & Joshua, 2009).
Elements of a Valid Contract and the Duty of Good Faith in the banking relationship
Needless to say, the actions of JPMorgan were a violation of the contract that existed between the bank and the consumers. There are varied components that make up a valid contract. First, an offer has to be made by one party. This underlines a definite promise for the party to be bound as long as the offer’s terms are accepted by another party. Secondly, there is the element of acceptance where the offer is unequivocally accepted by another party by act or statement. The third element of a contract is a consideration where the other party would essentially be giving something in return for the promise. In addition, the parties must be intending to enter into an agreement that is legally binding. The fifth element revolves around the legal capacity of the individuals involved in the contract (McKendrick, 2012). It is worth noting that individuals who are mentally impaired, minors, prisoners, or bankrupts are considered not to have the capacity to enter into agreements that are legally binding. In addition, the parties must have entered the contract by their own free will and in proper understanding of the terms and the actions of the other party (Fleuriet, 2008). Lastly, the contract must incorporate certainty with the regulations and terms of the contract being clearly stated and comprehended by the parties in the contract.
While all the elements may have been satisfied in the contract between JPMorgan Chase and its customers, the actions of the bank were in breach of the implied covenant of fair dealing and good faith. This is where the parties to the contract are presumed to deal fairly, honestly and in good faith with each other in order to prevent the destruction of the other party’s rights to receive the contract’s benefits (McKendrick, 2012). This is aimed at reinforcing the express promises or covenants pertaining to the contract. JPMorgan Chase did not act fairly and honestly in its presentation of financial information, as well as in the investment decisions that it made, which resulted in the massive losses to the consumers.
Intentional and Negligent Tort Actions
Torts are civil wrongs that unfairly cause an individual to suffer harm or loss resulting in legal liability for the individual that undertakes the tortuous act. Two tort actions namely intentional and negligent tort actions are identified. Intentional torts revolve around the purposeful act aimed at causing harm to an individual, while negligent tort actions revolve around the failure to take actions to rectify problems that would harm an individual. Negligence is characterized by varied elements including duty of care, breach of the duty, and proximate cause, as well as harm. An individual or entity would have to owe the other party a duty of care, which they then breach. There must be a proximate cause where the negligence of the entity was the actual cause of the injuries or harm to the other party (Rosenbaum & Joshua, 2009). The main distinction between intentional and negligent tort actions is that negligent tort actions do not incorporate a purpose to cause harm, rather are caused when an individual (entity) fails to undertake reasonable care thereby resulting in harm to another individual (Rosenbaum & Joshua, 2009). However, in both cases, the actions of the entity resulted in the harm or injury of an individual, in which case the entity would be legally liable for the harm.
Tort Action for “Interference with Contractual Relations and Participating in a Breach of Fiduciary duty”
As stated earlier, the directors or senior executives of JPMorgan Chase bank violated the contractual relations and the fiduciary obligations to their customers. Fiduciary duties necessitate that the actions of the fiduciary be solely in the principals’ best interests, free from conflict of interests, self dealing and other abuse of the principal for an individual’s personal advantage (Rosenbaum & Joshua, 2009). In essence, corporate directors, employees and executives are barred from making use of corporate assets and property for their personal advantage or even using corporate opportunities for themselves (McKendrick, 2012). Fiduciary duties refer to obligations to act in another party’s best interests, and exists where the relationships with clients revolve around special trust, reliance and confidence on the fiduciary to be discrete and use his expertise when action on behalf of the client. Proving breach of fiduciary duty in the case of JPMorgan comes as extremely easy especially considering that the claimant would need to prove two things. First, the claimant would need to show that the defendants were in a position of fiduciary relationship, trust or confidence, which they breached so as to benefit personally (McKendrick, 2012). The United States Code, Title 29, Chapter 18, Subchapter I, Subtitle B Part 4, No. 1109 states that any fiduciary any of the duties, responsibilities and obligations accruing to the fiduciary would be personally liable for any losses that result from each of the breaches and would be required to restore any profits pertaining to such fiduciary, which have been made via the usage of the assets pertaining to the plan by the fiduciary (Rosenbaum & Joshua, 2009). JPMorgan directors did not undertake proper monitoring and supervision of the sufficiency of the bank’s internal controls, in which case they allowed for the issuing of misleading filings and statements. On the same note, JPMorgan directors obtained unjust enrichment through the acceptance of director remuneration and compensation while breaching the fiduciary duties pertaining to JPMorgan. On the same note, a May 10 2012 filling by SEC shows that JPMorgan’s CIO had considerable market-to-market losses in the synthetic credit portfolio, which proved to be more volatile, less effective and riskier as an economic hedge than previously believed. Moreover, the losses emanated from gambles or ventures gone wrong in the CIO of the bank and revolved around losses in derivative positions. In essence, JPMorgan’s directors would be liable.
Mobile Banking: Protecting Automation Software
Mobile banking has been taken up by numerous banks and individuals all over the world. This may primarily be as a result of the convenience that it offers consumers (SCN Education, 2001). Testament to its popularity is the fact that about a fifth of Americans were accessing their financial information via their mobile phones, with the figure rising to a third of the mobile phone users by 2013. However, this new invention has also introduced another risk especially to the consumers and the banks. Research showed that, in 2011, Smartphone owners had a third higher likelihood of being victims of identity fraud. Scholars noted, however, that these wounds were self-afflicted as the Smartphone users had outdated software, stored their passwords on their mobile devices as plain text, and did not use home screen passwords (SCN Education, 2001). On the same note, banks stand a high chance of having the software that allows for automation hacked, which could lead to immense losses (SCN Education, 2001). Nevertheless, banks have undertaken measures at different levels to protect the software. At the level of the back end, there is the risk-based authentication, as well as anomaly detection that scrutinize requests for unexpected or unusual activity (Karim, 2011). The detection of any anomaly would result in shutdown of the system or the operation. In addition, they incorporate out-of-band authentication that depends on separate devices and not just the Smartphone for the operation to be cleared (Karim, 2011). On the same note, while the software may incorporate encryption, passwords and other security features for its protection, banks complement their security through the installation of anti-spamware alongside encryption of hardware operations (Karim, 2011). Computer VIRUS (vital information retrieval under siege) is usually crafted to impend the operations of software. In essence, keeping the computer antivirus software updated prevents the attacks on vital operations of software and prevents hacking (Karim, 2011).
Fleuriet, M. (2008). Investment banking explained: An insider’s guide to the industry. New York: McGraw-Hill.
Rosenbaum, J & Joshua, P (2009). Investment banking valuation, leveraged buyouts, and mergers & acquisitions. Hoboken, N.J.: John Wiley & Sons.
Karim, Z (2011). Online Banking: Securing the Information. New York: LAP Lambert Acad. Publ
SCN Education B.V. (2001). Electronic banking: The ultimate guide to business and technology of online banking. Braunscweig: Vieweg.
McKendrick, E. (2012). Contract law: Text, cases, and materials. Oxford, U.K: Oxford University Press.