To begin with, we would like to provide some background information about the case under consideration. In the summer of 2012, JPMorgan Chase, the biggest U.S. bank, announced trading losses from the investment decisions made by its Chief Investment Office (CIO) of $5.8 billion. The Securities and Exchange Commission (SEC) was provided with the falsified first quarter reports that concealed this massive loss.
First of all, we would like to say a few words about the global financial crisis, since it was associated with manipulations with the financial instruments. Banks and other financial institutions were among the main “initiators” of the global financial crisis. That is why, it is important to understand, why regulations on financial markets are essential. In fact, we are dealing with investment manipulations and manipulations with financial information in the case under consideration.
The main reason for the global financial crisis was fundamental disorders of the world’s financial system. Commercial banks and other financial institutions manipulated with the financial instruments, seeking for higher profits. A lot of such instruments were overestimated. It has caused a chain reaction in the global economy and led to the significant consequences.
One of the main consequences of this crisis was fall of the world’s fund markets
Investors were disappointed with a poor quality of majority of financial assets, and their desire to invest into them has fallen. On the other hand, the risk of investing into financial assets in general, and fund market, in particular, has significantly grown. Combination of these factors has led to the significant decline of the global fund market and, respectively, the price of shares of the different companies.
To conclude with this particular part of the research, we would like to say the following: the global financial crisis has led to the whole range of significant economic, political, and even social consequences. One of the reasons for the crisis was gambling with financial instruments. In order to prevent the same crisis in the future, it is important to regulate this industry. It is the function of such institutions like Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
SEC is a special institution in the United States of America responsible for regulation of the financial markets and markets of securities. The mission of this institution is to provide the highest possible degree of efficiency of the markets. One of the main goals of this institution is to protect the interests of investors, issuers, traders, and other participants of the financial markets. Some additional information about the mission of this organization can be found in the following quote:
“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever. As our nation's securities exchanges mature into global for-profit competitors, there is even greater need for sound market regulation” (U. S. Securities and Exchange Commission , 2013).
CFTC is another similar institution
In fact, it has almost the same goals. Its mission is to regulate markets of futures and options. As we know, manipulations on these markets have led to disorders in the global financial system. That is why, the role of this institution cannot be overestimated. Some additional information about this organization can be found in the following quote:
“Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, protecting market participants against fraud, manipulation, and abusive trading practices, and by ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk” (U. S. Commodity Futures Trading Commission , 2013).
The following question is what actions should be taken by the above mentioned institutions. We would like to consider such actions for both institutions, since their functions are quite similar. Moreover, the markets that are regulated are also quite similar. Thus, the mentioned institutions execute the following functions to prevent manipulation and other negative things on financial markets:
- To interpret federal securities laws and explain to the financial markets’ participants how to follow them in order to create the highest efficiency for the whole market;
- To issue rules and develop principles that determine conditions of performance on the financial markets. Once again, these rules and principles should provide the highest efficiency of the markets and protect the interests of their participants;
- To oversee the inspection of securities firms, brokers, investment advisers, and ratings agencies;
- To oversee private regulatory organizations in the securities, accounting, and auditing fields.
Thus, we can say that these organizations perform continuous control and monitoring of the markets. This function is very important, since it makes performance of regulative institutions and participants of the markets more flexible and appropriate to the existing conditions in the law and business environment.
Also, these organizations coordinate performance of all the federal institutions related to the financial markets. They also cooperate on the international level. It is very important in the conditions of continuous globalization.
Finally, these organizations impose fines and other forms of punishment to those, who break the stated rules of performance. For example, JP Morgan Chase should be punished in the case under consideration. The form of punishment is the subject of another investigation.
The next task of this research paper is to define the term valid contract and provide its main elements. In our opinion, one of the most appropriate definitions of this term is the following: A valid contract is a contact that includes all the essentials and is enforceable for all the parties of this contract. Thus, the following question is what the essentials of a valid contact are. Among them the following ones may be pointed out:
- Intention to create legal relationship;
- Lawful object;
- Agreement not expressly declared void;
- Proper offer and its acceptance;
- Free Consent;
- Capacity of parties to contract;
- Certainty of meaning;
- Possibility of performance;
- Lawful consideration;
- Legal formalities.
We would like to pay attention to the three of the above mentioned items: free consent, certainty of meaning, and lawful consideration. The most appropriate explanation of free consent is the following:
“According to section 14, consent is said to be free when it is not caused by (i) coercion, (ii) undue influence (iii) fraud, (iv) misrepresentation, or (v) mistake. If the contract made by any of the above four reason, at the option of the aggrieved party it could be treated as a void contract. If the agreement induced by mutual mistake the agreement would stand void or canceled” (Hubpages, 2012).
Certainty of meaning requires from text of a contract to be clear and understandable. There should not be any free consideration of the subject of a contract or other important elements. It is important to avoid any possible misunderstandings in future and potential cancelation of a contract.
Finally, lawful consideration means that services or goods must be got in return of money. In fact, this is a mission of any contract to exchange one value for another. It is manipulation in the opposite case. Generally, both parties of a contract should be fair to each other. They should not hide any information from each other. We will be forced to talk about the so-called asymmetry of information in the opposite case.
Now it is time to explain the difference between intentional and negligent tort actions. First of all, we would like to provide a definition of the term “negligent tort action”. In our opinion, one of the most appropriate definitions of this term is the following:
“Negligent tort action is a type of unintended accident that leads to injury, property damage or financial loss. In the event of an unintentional tort, the person who caused the accident did so inadvertently and typically because he or she was not being careful. The person who caused the accident is considered negligent because he or she failed to exercise the same degree of care that a reasonable person would have in the same situation” (Investopedia, 2013).
Simply speaking, negligent tort action is an action that unintentionally leads to financial or other injuries for the second party. In the case of intentional tort action, everything happens vice versa. We believe that in the case under consideration we deal with the intentional tort action. The bank understood possible consequences of its actions and should have avoided it. It means that appropriate sanctions should be applied to the bank. However, it is the question of another research.
The modern world is characterized by the fast development of technology. For example, commercial banks have introduced such product, as mobile banking. A formal definition of this phenomenon can be the following:
“Mobile banking refers to the use of a smartphone or other cellular device to perform online banking tasks while away from your home computer, such as monitoring account balances, transferring funds between accounts, bill payment and locating an ATM” (Investigating Answers, 2013).
The question is how the banks are able to protect financial transactions and important information using online banking. We believe that this technology is an instrument of future. That is why, it should be introduced. That is why banks invent new and new instruments of protection. For instance, they have introduced digital signatures and other similar technologies. They are quite safe in the case of their right usage.
To conclude, we would like to say the following: we have analyzed the case of manipulation with financial instruments in this paper. In the summer of 2012, JPMorgan Chase, the biggest U.S. bank, announced trading losses from investment decisions made by its Chief Investment Office (CIO) of $5.8 billion. The Securities and Exchange Commission (SEC) was provided with the falsified first quarter reports that concealed this massive loss.
Respectively, we have been forced to analyze functions of respective regulative bodies, elements of a valid contract, and explanation of intentional and negligent tort actions. We have proven that actions of the bank had been intentional. It means that it should be punished in an appropriate way. SEC should be an institution to define the form and the size of this punishment. It should become the subject of another research paper.