Former JPMorgan bankers charged in $6.2 billion loss probe

August 14, 2013 05:37 AM

Two former JPMorgan Chase & Co. employees were charged by U.S. prosecutors with attempting to conceal trading losses at the largest U.S. bank last year as part of a probe of its $6.2 billion loss on derivatives bets.

Javier Martin-Artajo, a former executive who oversaw the trading strategy at the bank’s chief investment office in London, and Julien Grout, a trader who worked for him, were charged with conspiracy, wire fraud and making false filings in complaints unsealed today in Manhattan federal court. The two men engaged in a scheme to falsify securities filings between March 2012 and May 2012, according to the government.

JPMorgan Chief Executive Officer Jamie Dimon characterized the $6.2 billion loss as “the stupidest and most-embarrassing situation I have ever been a part of.” First disclosed in May 2012, the bad bets led to an earnings restatement, a U.S. Senate subcommittee hearing and probes by the Securities and Exchange Commission and U.K. Financial Conduct Authority.

Dimon, 57, whose own pay was cut in half, pushed out senior executives including former Chief Investment Officer Ina Drew, who oversaw the London unit where the loss took place. The bank said it clawed back more than $100 million in pay from employees who were involved with, or oversaw, the trade.

‘London Whale’

Bruno Iksil, the Frenchman at the center of the case who became known as the “London whale” because his portfolio was so large, has been aiding the FBI and federal prosecutors for months in their probe as part of an agreement with the government for leniency, three people with direct knowledge of the situation said.

Martin-Artajo and Grout, both of whom are not in the U.S., are charged with four counts, including conspiracy to falsify books and records, commit wire and falsify securities filings, falsifying books and records, wire fraud and making false filings to the Securities and Exchange Commission.

Prosecutors in the office of U.S. Attorney Preet Bharara in Manhattan said the men manipulated and inflated the value of the position marks in the Synthetic Credit Portfolio, or SCP, which had been very profitable for the bank.

In 2009 it made more than $1 billion for JPMorgan, according to the government. From at least March 2012 until May 2012, the two men allegedly faked the value of position marks in the SCP in “order to obtain specific profit and loss objectives,” the government said.

‘Artificially Increased’

Martin-Artajo, Grout and unidentified co-conspirators at the bank “artificially increased the marked value of securities in order to hide the true extent of hundreds of millions of dollars of losses in that trading portfolio,” the U.S. said.

Attorneys for Martin-Artajo and Iksil declined to comment on the charges. Grout’s lawyers didn’t immediately respond to a request for comment.

Martin-Artajo was Iksil’s supervisor while Grout assisted him in valuing his trading book. JPMorgan ousted all three last year and sought to recoup some of their pay.

The Justice Department and the Federal Bureau of Investigation had been probing the trade for more than a year to determine whether employees at JPMorgan’s chief investment office attempted to inflate the value of trades on the bank’s books by mismarking them, a person with knowledge of the matter has said.

Edward Little, a partner at Hughes Hubbard & Reed LLP in New York who represents Grout, said in an Aug. 12 interview that his client was living in France and isn’t a fugitive.

Job Hunt

“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,” Little said.

Martin-Artajo was on vacation, his attorneys at Norton Rose Fulbright LLP in London said in an Aug. 13 statement.

He “received no communication from any governmental regulators, including the Financial Conduct Authority in the U.K. with whom he has fully cooperated, which would indicate that he should not be on vacation at this time,” they said.

Martin-Artajo has cooperated with every investigation required in the U.K. and is confident he will be cleared of wrongdoing when a “fair reconstruction of these complex events is completed,” the lawyers said in the statement.

Unless the defendants surrender to authorities, the U.S. will probably have to seek to have them extradited.

U.S. treaties with France and Spain give those countries discretion to decline to extradite their own citizens, said Evan T. Barr, a lawyer at Steptoe & Johnson LLP.

Extradition Issues

The age and nationality of the defendant, the severity of the charge and the type of punishment that’s expected all factor into a decision to extradite, said Robert J. Anello, a partner at Morvillo Abramowitz Grand Iason & Anello PC in New York.

“While it is more difficult to get an extradition from France than from the U.K., it is not impossible,” Anello said.

New York-based JPMorgan sued Martin-Artajo in a London court last October, without detailing its complaint in filings. That lawsuit was settled, a person with direct knowledge of the case said in January.

JPMorgan is negotiating the final terms of a deal with the SEC to end its yearlong probe of the trading loss, two people briefed on the talks have said. While the SEC may target some people involved in the trades, top executives probably won’t face claims they lied to or misled the public, the people said.

Escalate Concerns

The SEC may sue the firm for failing to enact proper controls, supervise workers, escalate concerns and share information internally, one person said.

The U.K.’s FCA is investigating whether JPMorgan provided the regulator with enough information about the risk the bank was taking, a person briefed on the matter said. A decision probably won’t come until the end of the year, the person said.

JPMorgan released its own internal report on the trading loss in January, which found an “error prone” risk-management system, traders overwhelmed by the complexity of their bets, and managers including Dimon who weren’t aggressive enough in halting the losses.

The bank still made a record $21.3 billion in profit last year.

In March, a Senate subcommittee accused JPMorgan in a 301- page report of hiding losses, deceiving regulators and misinforming investors. Drew, who ran the CIO, and her head of international CIO, Achilles Macris, left the company along with other top executives. The bank clawed back more than $100 million in pay from Drew and other managers.

Senate Report

The Senate subcommittee, led by Michigan Democrat Carl Levin, referred its findings to the SEC and Justice Department in April.

“There is reasonable cause to believe a violation of the law may have occurred,” Levin said at the time.

The FBI and the SEC scrutinized public statements, calls with investors and an April 2012 earnings presentation by Dimon and then-Chief Financial Officer Douglas Braunstein, according to five people with knowledge of the probes.

Investigators also reviewed, among other issues, whether London traders painted the tape, a form of market manipulation that allows them to inflate the value of their positions, three of the people said at the time.

The cases are U.S. v, Grout, 13-MAG-01976, and U.S. v. Martin-Artajo, 13-MAG-01975, U.S. District Court for the Southern District of New York (Manhattan)

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