The U.S. Justice Department on Wednesday criminally charged two former JP Morgan Chase (NYSE: JPM) traders for their role in last year’s 'London Whale' trading debacle.
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The government alleged in four-count indictments that Javier Martin-Artajo and Julien Grout participated in a conspiracy to hide and misrepresent losses taken by the biggest U.S. bank by assets. The duo was charged with falsifying books and records, wire fraud, and false filings with the Securities and Exchange Commission. While the transactions in question may have been “complex,” the criminal charges are “simple,” Preet Bharara, the U.S. Attorney in Manhattan, said during a press conference. The defendants “repeatedly and deliberately lied” to cover their losses, Bharara said.
These represent the first criminal charges in the case.
The SEC filed a parallel complaint seeking to force the two to return any ill-gotten gains and pay civil penalties.
A set of massive derivatives bets went sour in early 2012 and cost JP Morgan some $6 billion. The losses have been the subject of intense scrutiny from regulators because the bets suggested that big Wall Street banks were still taking excessive risks in the wake of the financial crisis of 2008.
Bharara said banks, as well as prosecutors, have to be constantly vigilant against rogue behavior because of the potential damage to the global economy that can be inflicted by one trader at a large bank.
Meanwhile, prosecutors announced that no criminal charges would be filed against Bruno Iksil, the JP Morgan trader at the center of the losing bets and the person originally dubbed ‘The London Whale.’ Iksil has agreed to cooperate with prosecutors, according to court documents released by Bharara’s office.
Martin-Artajo and Grout allegedly took part in a conspiracy in which they "artificially" valued holdings "in order to hide the true extent of the hundreds of millions of dollars in losses" the company's chief investment office was taking. The moves caused the New York-based bank to report incorrect quarterly results for the first quarter of 2012, the DOJ alleged.
The defendants “violated their obligation” to honestly value JP Morgan’s assets, Bharara said. “Capitalism works best when its captains don’t lie and cheat,” he added.
Martin-Artajo, 49, was Head of Europe and Credit & Equity at JP Morgan's CIO office and was responsible for overseeing the banking giant's synthetic credit portfolio, according to the SEC. He mainly worked out of the London office, and is a Spaniard. Grout, a 35-year-old Frenchman, was a vice president in the CIO office who reported to Martin-Artajo.
The CIO is responsible for hedging JP Morgan's exposure to certain shocks in the credit market. The head of the unit, Ina Drew, resigned in the wake of the debacle but apparently will not be charged in connection with the losses.
“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. 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,” said FBI Assistant Director George Venizelos in a statement.
Legal representatives for Martin-Artajo and Grout did not immediately respond to requests for comment. A JP Morgan spokesperson declined to comment.