NEW YORK – Two former JPMorgan Chase & Co. traders were accused of trying to conceal the size of the investment bank’s $6 billion trading loss last year in criminal conspiracy charges unsealed Wednesday that raised fresh questions about whether Wall Street learned its lessons from the 2008 financial crisis.
Javier Martin-Artajo, 49, and Julien Grout, 35, and their co-conspirators were accused of “artificially increasing the market value of securities to hide the true extent of hundreds of millions of dollars of losses,” according to court papers.
The case is related to a surprise loss last year attributed to trader Bruno Iksil, who became known as the “London Whale” for his location and the supersized bets he made.
The federal charges shift the narrative of the tale, saying Iksil tried to raise questions about how his colleagues were recording the trades.
They also portray bank employees as knowing exactly what they were doing, not workers simply overwhelmed by complicated systems – a defense banks have mounted for missteps in the financial crisis and its aftermath.
The charges place more of the blame on Martin-Artajo, who supervised JPMorgan’s trading strategy in London, than on his Grout, his subordinate who was in charge of recording the value of the investments each day. They are accused of conspiring to hide more than a half-billion dollars of losses in a trading portfolio that ultimately lost more than $6 billion.
George Venizelos, head of the FBI’s New York office, said the defendants “brought a whole new meaning to cooking the books.”
Martin-Artajo and Grout were charged criminally with conspiracy to falsify books and records, commit wire fraud and falsify Securities and Exchange Commission filings.
They also were charged separately in an SEC civil complaint.
The SEC said the men fraudulently mismarked investments in a vehicle known as the Synthetic Credit Portfolio, a hedge against adverse credit events that began to decline in value as credit markets improved in early 2012.
From March to May 2012, following Martin-Artajo’s direction, Grout began using prices for the portfolio “deliberately chosen to minimize losses rather than represent fair value,” the SEC said.
Iksil, uncomfortable with Martin-Artajo’s instructions, asked Grout to keep a spreadsheet to track the difference between the manipulated prices and the actual prices, according to the charges.
The court papers recounted conversations in various emails and phone calls. At one point, after Iksil reported a higher loss than Martin-Artajo wanted, Martin-Artajo told Iksil in a phone call, “This only creates – it just creates more tension, you understand? It’s not going to help me as much, right?” Finally, Martin-Artajo told Iksil, “I think that you’re an honest guy, you know. It’s just that, I did not want you to do it this way.”
Martin-Artajo and Grout were in the midst of their mismarking scheme in April 2012 when media reports publicized the large size of the portfolio they controlled, the SEC noted. The first trading day after the reports surfaced, the portfolio fell in value by hundreds of millions of dollars, it said. Still, Martin-Artajo directed Grout to disclose to management only $5.7 million in daily losses, a figure Grout put out but replaced later in the day with a loss of $395 million, the SEC said.
In July of that year, JPMorgan announced it would restate its first quarter results for net revenue by $660 million.
The SEC seeks injunctions against the two as well as unspecified fines and restitution of allegedly illicit profits they gained.
A JPMorgan spokesman declined to comment.
Lawyers for Grout and Martin-Artajo, both United Kingdom residents, did not immediately return calls for comment. Martin-Artajo is a citizen of Spain while Grout is a citizen of France. Martin-Artajo mainly worked in London, though he sometimes worked at JPMorgan offices in the United States, including New York. Grout was based in London.
The “London Whale” accusations have been a heavy millstone for JPMorgan, tarnishing its reputation as a stellar risk manager and the favorite of Washington lawmakers. It has become a bruising embarrassment for a bank that’s used to coming out ahead of its peers.
Wednesday’s charges are hardly the end: The SEC, Congress, the Federal Reserve, federal banking regulators and the U.K. Financial Conduct Authority, among others, are also looking into the trading loss. In the spring, rumors swirled that CEO and chairman Jamie Dimon, who once dismissed furor around the loss as a “tempest in a teapot,” might lose his chairmanship over the controversy, though shareholders voted to let him keep it.
JPMorgan, the biggest U.S. bank by assets, has weathered the storm. Last year, even with the trading loss, the bank pulled in its biggest annual profit ever and its stock is up by a third from its pre-”London Whale” price.
The bank has also gotten rid of top executives and taken back bonuses of some who were responsible. It acknowledged mistakes but has been adamant that it did not try to mislead investors.
Prosecutors also announced Wednesday that they had agreed not to prosecute Iksil, the trader who allegedly made the bad bets. The deal requires him to cooperate fully with law enforcement.
The FBI’s Venizelos said the case should be a warning to bankers and traders.
“Integrity and probity cannot be sacrificed in the pursuit of income and profitability,” he said. “The FBI will continue to investigate these cases so long as people fail to heed that message.”