London whale resurfaces to help U.S. with JPMorgan trading probe

August 12, 2013 06:59 PM
Prosecutors may announce charges this week

Bruno Iksil, the former JPMorgan Chase & Co. trader whose bets caused more than $6.2 billion in losses last year, is now central to any U.S. charges against his former colleagues.

Iksil, the Frenchman who became known as the London Whale because of his trading book’s size, has been cooperating with the Federal Bureau of Investigation and the Manhattan U.S. Attorney’s Office for months in their probe of the New York- based bank’s biggest trading debacle ever, said three people with direct knowledge with the matter. Iksil won’t face charges as long as he cooperates and testifies, the people said.

Prosecutors may announce charges as early as this week against former London-based JPMorgan employees, accusing them of trying to mask losses on a complex derivatives portfolio, said another person who asked not to be named because the investigation isn’t public. The episode has already sparked a Senate subcommittee hearing and prompted JPMorgan’s board to cut Chief Executive Officer Jamie Dimon’s pay in half.

“Jamie Dimon really wants to put this issue behind the bank,” said Christopher Wheeler, an analyst at Mediobanca SpA in London who has an outperform rating on JPMorgan’s stock. Charges against former employees would mean “JPMorgan will have to put up with having its dirty linen washed in public.”

It still isn’t clear who may be charged, the person said. Javier Martin-Artajo, a former executive who supervised Iksil’s trading strategy, and Julien Grout, a trader who helped mark Iksil’s book, are likely to be charged, the New York Times reported Aug. 9. Prosecutors also are weighing penalties for the bank, including a fine and reprimand, the newspaper said in a subsequent report.

Police Visit

Jennifer Queliz, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, and Peter Donald at the FBI’s New York office declined to comment on the investigation.

Police showed up at Grout’s home in London last week and his landlord gave them a forwarding address in the south of France, said a person with direct knowledge of the matter. A spokesman for London’s Metropolitan Police declined to comment on whether officers visited Grout’s home. A French citizen, Grout may be difficult to arrest if he’s charged because France has tougher extradition laws than the U.K., the person said.

“He is not a fugitive,” said Edward Little, a partner at Hughes Hubbard & Reed LLP in New York who represents Grout. “He visited the U.S. last month with confidence he was not being indicted and moved to France to save money and look for a job. We did not expect a decision on the investigation one way or another until the fall.”

Chipping Norton

Martin-Artajo, a Spaniard, is away with his family, according to his next-door neighbor in Chipping Norton, England, who declined to give his name. Attorneys for Martin-Artajo and Iksil declined to comment as did a spokesman for the bank.

JPMorgan ousted all three last year and sought to recoup some of their back pay.

The U.S. is investigating whether the traders at JPMorgan’s chief investment office in London intentionally inflated the value of their portfolio to conceal losses, a person with knowledge of the matter has said. Federal officials are considering charges related to mismarking books and falsifying documents, the person said.

Under pressure from Martin-Artajo, Iksil and Grout in January 2012 changed how they valued their portfolio in a way that made losses look smaller, according to a report and more than 600 pages of exhibits released in March by the U.S. Senate Permanent Subcommittee on Investigations. Grout maintained a separate spreadsheet that showed losses would have been as much as $498.7 million higher by mid-March 2012 if they used less favorable calculations, according to the panel’s report.

Achilles Macris

The Senate panel, led by Michigan Democrat Carl Levin, accused JPMorgan of hiding losses, deceiving regulators and misinforming investors. Ina Drew, who ran the chief investment office, and her head of international CIO, Achilles Macris, among other top executives, both left the bank. JPMorgan clawed back more than $100 million in pay from Drew and other managers.

The Senate panel referred its findings to the SEC and Justice Department in April.

Drew told lawmakers at the March hearing that she wasn’t aware of what she described as the “deceptive conduct” of her subordinates until after she left the bank.

Macris, a former co-head of capital markets at Dresdner Kleinwort Wasserstein, recruited Martin-Artajo, whom he had known at Dresdner, to oversee CIO trading in Europe as well as global equity and credit trading.

Next page: Highest-Paid Traders

Highest-Paid Traders

Iksil, who joined the CIO in 2005, became the chief trader for the credit-derivatives book in January 2007. He used his portfolio to hedge against corporate-bond defaults as the U.S. economy weakened, and it produced a profit of about $2.5 billion during the five years ended in 2011.

Martin-Artajo and Iksil were among the highest-paid traders and managers at the bank, receiving $12.8 million and $7.3 million respectively for 2010. Macris was paid $17.3 million -- more than Drew, who received $15 million. Dimon was paid $23 million for that year.

As daily losses ballooned in March 2012, the pressure from Martin-Artajo to report higher values mounted, according to the Senate report.

“I can’t keep this going; we do a one-off at the end of the month to remain calm,” Iksil told Grout, the junior trader, in discussing a month-end price adjustment requested by Martin- Artajo, according to a transcript of a March 16, 2012, call. “I don’t know where he wants to stop, but it’s getting idiotic.”

Without Consequences

That same day, Iksil told Grout and fellow trader Luis Buraya that the difference between the prices at which he was marking the book and market prices was $300 million and could be $1 billion by the end of the month at the pace they were going, according to the Senate report and the traders’ instant messages.

Iksil reported a year-to-date loss of $161.1 million on March 16, 2012, while the actual figure was closer to $600 million, according to Grout’s separate spreadsheet.

“I am going to be hauled over the coals,” Iksil told Grout in a March 23, 2012, instant message. “You don’t lose $500M without consequences.”

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