Ex-JPMorgan traders urged to surrender on whale case charges

August 15, 2013 11:30 AM

U.S. prosecutors urged former London-based JPMorgan Chase & Co. traders Javier Martin-Artajo and Julien Grout to surrender and face charges that they attempted to hide trading losses tied to the bank’s $6.2 billion loss on derivatives bets last year.

Martin-Artajo, a Spanish citizen, and Grout, a French citizen, should “do the right thing,” Manhattan U.S. Attorney Preet Bharara said at a press conference yesterday. Both men face as long as 20 years in prison if convicted of the most serious counts, including conspiracy and wire fraud.

While Bharara said he was “hopeful” they would return, he had arrest warrants filed under seal along with criminal complaints Aug. 9, according to court records. The warrants were to be served on the State Department, Interpol and foreign law enforcement agencies. The next day, police showed up at Grout’s London home, according to a person with knowledge of the matter. Grout wasn’t there. His lawyers have said he’s in France.

Martin-Artajo oversaw trading strategy for the synthetic portfolio at JPMorgan’s chief investment office in London, while Grout was a trader who worked for him. They are charged with conspiring to falsify securities filings from March to May of 2012. The U.S. sought to keep the charges secret while arrests were attempted, but eventually had them unsealed yesterday.

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.


U.S. investigators said their probe is continuing, alluding to “pressure from above” the defendants at the bank, and what one of the two traders claimed was direction from superiors in New York to stem the losses, according to court papers.

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.

Bruno Iksil, the Frenchman at the center of the case who became known as the “London Whale” because his portfolio was so large, signed a non-prosecution agreement with the U.S. in June, the government said. He pledged to cooperate with investigators as part of the deal.

Tempest, Teapot

“This was not a tempest in a teapot but rather a perfect storm of individual misconduct and inadequate internal controls,” Bharara said, referring to Dimon’s April 13, 2012, statement dismissing reports about the unit’s losses. “The defendants deliberately and repeatedly lied about the fair value of billions of dollars in assets on JPMorgan’s books in order to cover up massive losses that mounted month after month at the beginning of 2012.”

Bharara said it was extremely rare for his office to give someone like Iksil a non-prosecution agreement, and that a number of factors went into the decision, including his “relative culpability” and the degree of his cooperation.

“I don’t think you could call him blameless, but he did sound the alarm more than once,” Bharara said.

Bharara said that the complexity of the financial instruments the two defendants were working on didn’t excuse their behavior.

“The difficulty inherent in precisely valuing certain kinds of financial positions does not give people a license to lie or mislead or cover up losses,” he said. “And it goes double for handsomely paid executives at a public company whose actions can roil markets and upend the economy.”

Avoiding Extradition

The defendants could force a drawn-out extradition battle if they choose to fight efforts to bring them to the U.S.

Attorneys for Martin-Artajo and Grout declined to comment. Jonathan New, a lawyer for Iksil, said in a statement the U.S. declined to charge his client and that he is cooperating.

Martin-Artajo, 49, and Grout, 35, face four counts: conspiracy to falsify books and records, commit wire fraud and falsify securities filings; falsifying books and records; wire fraud; and making false filings to the SEC.

“It seems the prosecutors have gone after the low-hanging fruit in terms of the charges,” said Andrew Stoltmann, a lawyer in Chicago who represents investors in securities litigation. He said “a compelling argument” could be made for charging JPMorgan or its senior executives “who misled investors on the size and scope of the losses.”

Joe Evangelisti, a spokesman for the bank in New York, declined to comment on the charges.

Manipulated, Inflated

“While the feds are making a big splash by arresting the ‘London Whale’ minnows, there will be no justice until the whales in the executive office are charged,” said Dennis Kelleher, president and chief executive officer of Better Markets, a nonprofit group that seeks to promote the “public interest in financial markets,” in an e-mailed statement. “Two arrests are a good start, but it must be the beginning of a major change at the Department of Justice and the SEC where they finally apply the law without fear or favor to the wealthy, powerful and well-connected of Wall Street.”

Prosecutors in Bharara’s office said Martin-Artajo and Grout manipulated and inflated the value of the position marks in the Synthetic Credit Portfolio, or SCP, which the government said had been very profitable for the bank’s chief investment office, or CIO. 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 “to obtain specific profit and loss objectives,” the U.S. said.

‘Artificially Increased’

Martin-Artajo, Grout and others 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.

Samuel Buell, a former federal prosecutor who teaches at Duke University School of Law, said the government appears to have strong e-mail and recorded evidence supporting their case.

The “defendants won’t be able to wiggle much on the facts,” Buell said in an e-mailed comment.

Buell added that “an accounting fraud case based on marking derivative positions is necessarily going to involve judgment issues that give the defendants some running room, especially if a criminal jury wants to know, as they often do, that the defendants really knew they were breaking the rules, and not just pushing the envelope hard.”

SEC Allegations

In a parallel lawsuit filed yesterday in Manhattan federal court, the SEC said the two defendants “engaged in a scheme to enhance the SCP’s apparent performance and thereby curry favor with their supervisors and enhance their promotion prospects and bonuses.”

Martin-Artajo also sought to forestall a possible plan by JPMorgan to transfer the SCP out from under his control and away from the CIO, according to the regulator’s lawsuit.

The SEC is seeking disgorgement of ill-gotten gains and unspecified financial penalties.

Martin-Artajo was Iksil’s supervisor while Grout assisted 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 have been probing the trade for more than a year, a person with knowledge of the matter has said.

Government’s Narrative

Beginning in January 2012, the SCP began to lose money, with the CIO reporting about $130 million in mark-to-market losses for the month. According to federal prosecutors, there was a growing disparity between values in the SCP’s positions and what traders truly believed the positions to be.

Both defendants sought to hide the losses in securities filings, causing JPMorgan to record false data for the SCP in the first quarter of that year, prosecutors alleged.

The two men persisted in the scheme of “systematically and fraudulently valuing” the securities in the SCP until “at least May 2012,” the government said.

Martin-Artajo’s supervisor sent him an e-mail on Jan. 31, 2012, saying that the financial performance was “worrisome” and indicated a need to “urgently reevaluate” the core position. He was directed to focus all his attention on the SCP’s performance, the U.S. said.

SCP losses continued through February, and Martin-Artajo was subject to increasing scrutiny by his JPMorgan superiors. He began pressuring Grout and an alleged co-conspirator to manipulate the SCP’s position in such a way to show smaller losses, prosecutors said. At the end of the month, the CIO reported about $88 million in mark-to-market losses in the SCP for the month.

Aggressively Hide

In March, both men began to more aggressively hide the losses, causing false entries in the bank’s books and records during the month as well as at month-end, the U.S. said. Grout created a spreadsheet at the request of a co-conspirator, the government alleged, which as of March 15 overstated the SCP marks by about $292 million.

The mismarkings of the SCP continued into April, the U.S. said. Grout, Martin-Artajo and others at the bank hid the mismarkings by taking advantage of the CIO’s Valuation Controls Group, which was supposed to serve as an independent check on the valuations assigned to the securities by traders at month- end, prosecutors said.

The group “was neither independent nor rigorous,” prosecutors alleged, and instead was staffed in London with “essentially a single employee” who relied upon traders’ views of the market.

‘Full Advantage’

Martin-Artajo and Grout “took full advantage of the freedom” that the CIO’s Valuation Controls Group offered, and “regularly interacted with the VCG employee, provided their views of the market to the VCG employee and provided their selection of broker quotes.”

As a result, the group didn’t perform any meaningful checks, the U.S. alleged.

In July 2012, JPMorgan announced it would restate its first-quarter net revenue by $660 million, reflecting its loss of confidence that the marks “reflect good faith estimates of fair value.”

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

“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. France has no obligation under its extradition treaty with the U.S. to send Grout to New York.

On Vacation

Martin-Artajo, a Spanish citizen, 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, the lawyers said in the statement.

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

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

Charge Severity

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 white collar criminal defense lawyer with 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 public 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 the agency’s yearlong probe of the trading loss, two people briefed on the talks have said. Top executives probably won’t face claims they lied to or misled the public, they said.

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

‘Explainable’ Event

In its lawsuit yesterday, the agency accused Martin-Artajo and Grout of securities fraud, as well as books and records violations related to the mismarking of JPMorgan’s positions.

The complaint provides a detailed history of how the two men and Iksil interacted in the weeks leading up to news of the multibillion-dollar loss.

Upon returning to London from JPMorgan’s headquarters in New York in early March 2012, Martin-Artajo instructed Iksil to disclose losses in the CIO book “only when there was an explainable market event,” according to the complaint. Gains, however, should be recorded as they occur, he added.

Martin-Artajo said the instruction came from “New York,” a reference to the bank’s upper management, according to the SEC.

On March 12, Iksil questioned Martin-Artajo, his superior, about the lack of volatility in the CIO’s book over the previous week. In an e-mail, Iksil wrote that the daily profit and loss “noise” should be in the range of $20 million to $40 million. And yet, the SEC stated, “Grout’s daily reports to management showed profit and loss volatility of only $122,000 to $1.1 million.”

Ignored Iksil

The SEC described how Grout, Iksil’s subordinate, allegedly ignored Iksil’s requests to mark certain CIO positions within the latest bid-offer spreads available. As an example, the complaint stated that Grout told Iksil he was able to come up with a $4 million loss for March 16 with “lots of effort.”

If Grout had followed Iksil’s marking request, the daily loss would have been greater than $100 million, the SEC said.

The SEC refers to a spreadsheet containing data “quantifying the increasing divergence” between Grout’s optimistic marks for the CIO positions and “mid-market prices.”

As of March 15, the spreadsheet reflected a divergence of $292 million, the SEC said. Within a few days, the divergence swelled to $432 million.

Alert Management

Later in the month, the SEC alleged, Martin-Artajo urged Iksil not to alert management to the growing losses within the synthetic credit portfolio. On March 20, after Iksil sent out a report predicting a loss of $40 million, Martin-Artajo called to rebuke him, the SEC said. Iksil’s report was sent to about 20 people in the bank, according to documents released by a Senate subcommittee.

“Why did you do that?” Martin-Artajo asked on a call excerpted in the complaint. “I thought we should actually you know, not do like minus, minus 5 every day but just say okay boom you know there is, there is something happening,” Iksil replied.

“I don’t understand your logic, mate, I just don’t understand,” Martin-Artajo replied, according to the complaint. “I know that you have a problem you want to be at peace with yourself...I didn’t want to show the P&L…you know, I think that you’re an honest guy, you know, it’s just that, I did not want you to do it this way.”

In early April, after Bloomberg News and then the Wall Street Journal reported the existence of “the London Whale” within the bank’s London trading office, Grout informed Iksil that the synthetic credit portfolio had dropped precipitously.

‘Staggering Decline’

“Despite the staggering decline,” the SEC said, “on the evening of April 10, Grout disseminated a report, at the direction of Martin-Artajo, showing a daily mark-to-market loss for the SCP of only $5.7 million. An hour and a half later, Grout replaced this report with another one that reported a much higher daily loss of $395 million.”

According to the criminal complaints, on April 13, JPMorgan reported its results for the first quarter of 2012, and because of the actions of the defendants, the bank’s consolidated income was overstated by hundreds of millions of dollars.

A week later, JPMorgan received collateral calls of more than half a billion dollars related to the SCP’s investments, at which point the bank relieved both Martin-Artajo and Grout of their authority to trade and mark the SCP, the government said.

FCA Probe

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 complaints tell a story of a group of traders who got in over their heads, and to get out, doubled down on a series of risky positions,” said FBI Assistant Director George Venizelos in a statement following the charges. “In the first quarter of 2012, boom turned to bust, as the defendants, concerned about losing control to other traders at the bank, fudged the numbers on their daily book, and in some cases completely made them up. It brought a whole new meaning to cooking the books.”

The cases are U.S. v. Grout, 13-MAG-01976, and U.S. v. Martin-Artajo, 13-MAG-01975, U.S. District Court, Southern District of New York (Manhattan). The SEC case is Securities and Exchange Commission v. Martin-Artajo, 13-cv-05677, U.S. District Court, Southern District of New York (Manhattan).


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