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.
“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.
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.”
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.