A Mob Bookie Schools JP Morgan on Fraud

The federal government just fined JP Morgan Chase $920 million. And that’s because the feds decided to go easy on the bank.

Robert De Niro as Mob bookie and casino boss Ace Rothstein

Now, as part of the settlement, JP Morgan must adopt the anti-fraud methods of a Mob bookie and casino boss.

“Spoofing” Markets through Bogus Orders

JP Morgan traders unlawfully manipulated the market through a scam called “spoofing.” For example, traders would place a large order to buy a certain commodity while also placing a series of small orders to sell that same commodity.

The traders did not intend for the large buy order to go through. Instead, the large order head-faked the market into thinking greater demand existed for the commodity than was the case. This allowed the smaller trades to clear at higher prices. Then the traders would cancel the large buy order.

Input v Output Review of Anti-Fraud Efforts

Regulators reportedly went easy on JP Morgan because, since a 2015 debacle, the bank hired hundreds of new compliance officers and spent over $335 million on compliance related costs.

This represents old (and prototypically governmental) thinking based on inputs. The strong trend in compliance and enforcement employs the methods of a Mob bookie and casino boss to look at outputs.

Mob Lessons on Fraud

In the Scorsese film, Casino, a Mob bookie and casino boss finds out that his dim-witted slot-machines manager just paid three jackpots in 20 minutes:


You didn’t see the scam? You didn’t see what was going on?


Well, there’s no way to determine that . . . .


Yes there is. An infallible way! They won!


Well, it’s a casino! People gotta win sometimes.


Now you’re insulting my intelligence . . . . You know goddamn well that someone had to get into those machines and set those . . . reels. The probability of one four-reel machine [hitting a jackpot] is a million-and-a-half to one; the probability of three machines in a row [hitting a jackpot]; it’s in the billions! It cannot happen!

Continuous Improvement Expands from Manufacturing and Services into Ethics and Compliance

For decades, statistical analysis has driven continuous-improvement methodologies in manufacturing and services. Approaches include Total Quality Management, Six Sigma, and Lean.

Increasingly, automated audit software scans trading and other business activities looking for statistical anomalies, like three jackpots in 20 minutes, or an unbroken string of profitable trades. Any red flags trigger investigation.

The SEC has used such software for years. With business processes more and more digitalized, such software can peer ever deeper and broader into a company’s or group’s activities.

The Government’s deal with JP Morgan signals a regulatory push for companies to install similar systems for internal compliance. Federal prosecutors speak softly, but carry a very, very big stick. For ethics and compliance programs, automated statistical analysis moves from a nice-to-have to a have-to-have.

My new book discusses the nuts and bolts of such systems that everyone serious about ethics and compliance needs to know.


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