Coruscation

Typically, changes in value-at-risk models at banks are made by committees composed of managers who monitor risks and business heads who take them, according to risk management experts.

Banks in the United States are required to give investors periodic counts of their value-at-risk. The numbers are calculated and presented differently across companies, but in general are supposed to show a minimum amount that a portfolio could be expected to lose in each of a few days during a quarter.

What's most useful to investors is not so much the actual numbers, but how much they change, experts say.

JPMorgan first told investors on April 13 that the reading of risk at its CIO unit as of the end of March showed that the unit could lose at least $67 million in a single trading day, slightly less than the $69 million from the previous reading in December.

The report indicated steady risk management in the CIO's office, which was in contrast to press reports at the time that a London-based trader for JPMorgan was taking whale-sized positions.

But on May 10 when the bank suddenly disclosed the $2 billion-plus loss, it also revealed for the first time that the $67 million reading had been calculated with a new model. The prior model showed risk had actually spiked as the value-at-risk nearly doubled to $129 million.

Had the higher number been reported, said analyst Jason Goldberg of Barclays, "certainly, they would have been asked why the VaR doubled."

To bring a potential case against JPMorgan over its value-at-risk model change, the SEC will need to decide if the failure to disclose the model change was "material." In other words, would a reasonable investor see the information as significant?

Experts are divided on whether the understatement of risk by the bank will meet the SEC's legal test. It is unclear if investors would have seen the hike in risk-taking as something that could lead to a big trading loss.

Since the financial crisis, the SEC has faced a barrage of criticism for what some say is a failure to go after the top executives at the country's major banks.

Several legal experts say that the failure of JPMorgan to disclose changes to its value-at-risk modeling could actually present a prime opportunity to do just that.

"To make management sweat a little bit, the SEC's focus might well be on internal controls," said Charles Whitehead, a professor at Cornell Law School and former Wall Street executive.