[ by Melanie Gretchen ] The SEC currently is investigating the trading operations of JPMorgan Chase, in search of  internal control or supervisory deficiencies, and violations of securities rules and regulations.  Two Reuters reporters - Sarah Lynch and David Henry - analyzed where the bank may be most vulnerable and identified strategic areas that the SEC might pursue when building a case against JPMorgan. When discussing her agency's investigation of the bank's financial reporting, SEC Chairman Mary Schapiro mentioned the bank's obligation to publicly disclose changes to their risk model.  Thus, its probable that JPMorgan's risk model would be the first area that would come under fire and the most damaging.  By omitting how it measured risk in its April earnings release, the bank halved the riskiness of a trading portfolio – a detail which experts say will be regulators' best chance of holding JPMorgan accountable. The bank announced that the model for its Chief Investment Office had been changed the same day it disclosed had lost more than $2 billion.  However, proving that the change in the risk model in January affected shareholders' interests will not be an easy task – specifically when the SEC uses the JPMorgan investigation as a scapegoat in future pursuit of banks. "I would think this is a case that gets down to questions about just how aggressive the SEC wants to be." -- Jim Cox, a professor at the Duke University School of Law. Straight from the Horse's Mouth. JPMorgan CEO Jamie Dimon, 56, is expected to be questioned over the change in the risk model on Wednesday when he testifies before the Senate Banking Committee.  To date, the company head has not said when or why the model was changed, nor who knew about it – only that the portfolio not only took on too much risk, but "was badly monitored."  [CI Note: That would appear to be obvious.] A person more familiar with the matter said the model was changed in January by a committee - commonly comprised of managers who monitor risks, and business heads who take them, according to risk management experts. The Rule Book. In the United States, banks are required to provide investors with periodic counts of their value-at-risk (VaR), showing a minimum amount that a portfolio could be expected to lose in each of a few days during a quarter.  What's crucial is how much they change, and not the actual number, according to experts. JPMorgan issued a statement on 4/13/12 that the CIO unit could lose at least $67 million in a single trading day.  However, on May 10 when the bank announced the $2 billion loss, it also revealed that the $67 million reading was the product of a new model - when in fact the risk had almost doubled to $129 million. If the higher number been reported, said analyst Jason Goldberg of Barclays, "certainly, they would have been asked why the VaR doubled." Doubt. To get the JPMorgan for the value-at-risk model change, the SEC will need to show significant, "material" effects, dependent on whether investors would have seen the hike in risk-taking as something that might lead to a big trading loss. "It may look bad and it may smell rotten, but it is not obvious that switch would have greatly misled the market or greatly influenced the stock price.  That is a materiality question." -- Lawrence Cunningham, a law professor at George Washington University. However, current market conditions may work in the SEC's favor, said Elizabeth Nowicki, a professor at Tulane University Law School, following the financial crisis of 2008: "When disclosure was a huge, huge issue leading to the debacle of 2008, it is important to the SEC to show no mercy on the issues of disclosure in the financial industry. Window of Opportunity. What's startling in all of this is how much CEO Dimon claims that he didn't know, a situation that the SEC may attempt to seize upon.  CFO Doug Braunstein's failure control the bank's internal financial reporting and disclosure procedures to investors is another surprising issue.  Following this road may also provide insight into how the model was changed, and who at the company knew what - and what the company and its executive may pay in settlement fees. "To make management sweat a little bit, the SEC's focus might well be on internal controls." -- Charles Whitehead, a professor at Cornell Law School and former Wall Street executive. For further details, go to [Reuters, 6/12/12].