Kevin McCoy, USA TODAY
NEW YORK (USA TODAY) - Two former JPMorgan Chase traders Wednesday became the first suspects hit with criminal allegations for allegedly hiding massive trading losses in the $6.2 billion "London whale" disaster.
In a newly forceful action against Wall Street, federal prosecutors and securities regulators filed charges against Javier Martin-Artajo, 49, a former JPMorgan Chase managing director and trading supervisor in the global bank's London office, and Julien Grout, 35, another former trader there. The ex-employees, were charged with conspiracy, falsifying books and records, wire fraud and making false filings with the Securities and Exchange Commission.
"The defendants' alleged lies misled investors, regulators and the public, and they constituted federal crimes," said Manhattan U.S. Attorney Preet Bharara. Invoking the same phrase bank CEO Jaime Dimon used last year in initially soft-pedaling the losses, Bharara added " this was not a tempest in a teapot, but rather a perfect storm of individual misconduct and inadequate internal controls."
The Securities and Exchange Commission simultaneously filed a parallel civil complaint in which the agency signaled it would hold the bank accountable for disclosing inaccurate information to investors about the trading.
"JPMorgan failed to furnish to the commission ... such financial reports as the commission has prescribed," the civil complaint charged.
The court filings depicted the suspects as knowingly manipulating bank records while trading losses piled up - and as pressure mounted from senior officers aware of the growing problem. "They definitely knew they were cooking the books," said Bharara.
The allegations focus on derivatives trading in JPMorgan's Chief Investment Office based in the global bank's London and New York locations. The office had more than 100 traders who managed excess deposits that totaled approximately $350 billion in 2012, the court complaints charged.
The London traders worked on a portfolio that totaled approximately $157 billion in net positions.
According to court document affidavits by FBI agent Jonathan Polonitza, Martin-Artajo and Grout manipulated the portfolio that tracked trading "in order to achieve specific daily and month-end profit and loss objectives."
Essentially, the co-conspirators "artificially increased the marked value of securities in order to hide the true extent of hundreds of millions of dollars in that trading portfolio," the affidavit alleged.
The alleged scheme resulted in a fast-growing disparity between the value of trading positions listed in the bank's financial records and the amount those positions were actually worth. The manipulation "artificially increased the marked value of securities in order to hide the true extent of hundreds of millions of dollars in losses in that trading portfolio," the court complaint charged.
The conspiracy operated from at least March 2012 through May of that year, the court complaints charged.
JPMorgan Chase's April 13, 2012, quarterly earnings release and the quarterly statement the bank filed with the SEC the next month were "based in part on false and fraudulent information" provided by Martin-Artajo, Grout and an unidentified co-conspirator, the court complaints charged.
The bank ultimately announced in July 2012 that it would restate its first-quarter results by $660 million to reflect the estimated losses at that time.
Attorneys for Martin-Artajo at the Norton Rose Fulbright law office in London declined to comment on the charges. But in a statement issued Tuesday, the attorneys said he was confident "that when a complete and fair reconstruction of these complex events is completed, he will be cleared of any wrongdoing."
Manhattan defense attorney Edward Little said Grout was on a pre-scheduled vacation outside Great Britain but had no intention of fleeing to avoid prosecution. Little said that Grout had relocated to seek work in France after he lost his job at JPMorgan Chase.
Bharara declined to discuss potential efforts to extradite the suspects to the U.S., but said he hoped the traders would "do the right thing."
Authorities and the court filings confirmed that a cooperating witness who won't be charged in the case is Bruno Iksil, the former JPMorgan Chase trader who was dubbed the London whale for the size of his financial bets. That could make him a key government witness against former co-workers.
Iksil "did sound the alarm more than once" about record manipulation, said Bharara.
The criminal complaints state that senior bank officials were concerned about the internal valuations assigned to the trading positions and apparently pressured traders. In March 2012, Martin-Artajo allegedly directed Iksil and another bank employee "not to show any additional losses" in the portfolio if those losses were caused by a continued downward market trend.
Martin-Artajo allegedly explained "that this was what 'New York' - that is the bank's senior management in New York - wanted, explaining that those JPM officials did not want to see day-to-day market volatility," the court complaint charged.
"I don't know where he (Martin-Artajo) wants to stop, but it's getting idiotic," Iksil told Grout during a March 16 online chat, referring to bank entry efforts that hid the size of the derivatives trading losses.
The court allegations trail behind a March U.S. Senate subcommittee report that concluded JPMorgan Chase had piled on risk, hidden losses, disregarded risk limits, dodged regulatory oversight and misinformed the public during the London-based trading episode.
The trading loss and investigation has been a black eye for JPMorgan Chase and Dimon. Now, however, the bank is said to be negotiating a potential civil settlement with the U.S. Department of Justice, the Securities and Exchange Commission and the United Kingdom's Financial Conduct Authority.
Mark Kornblau, a JPMorgan Chase spokesman in London, said the bank declined to comment on the new 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, head of Better Markets, a financial watchdog organization.