Hunted: Who will pay the price for the London Whales £6bn loss?
Threat of criminal action against ex-employees over botched trades puts new pressure on humbled JP Morgan
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Tuesday 13 August 2013
The botched derivatives trades that saddled JP Morgan with losses in excess of $6bn (£4bn) last year have already triggered the departure of a clutch of top employees, sparked questions from shareholders, regulators and Congress, and led the bank’s board to slash Jamie Dimon’s pay for 2012, cutting the powerful chief executive’s compensation by half.
Now prosecutors investigating the “London Whale” trades, named as such after the market moniker for Bruno Iksil, the London-based trader at the centre of the affair, are considering criminal charges against two of the bank’s former employees.
The possibility of criminal action against Javier Martin-Artajo, Mr Iksil’s supervisor when he placed the ill-fated bets, and Julien Grout, a former junior trader at the bank’s London office, comes against the backdrop of settlement talks between the giant American bank and the US Securities and Exchange Commission as the regulator wraps up a separate investigation into the trades.
The SEC is said to be pressing for an admission of wrongdoing by the bank, an unusually assertive stance for a regulator that has come under fire for being too lax on Wall Street’s biggest players. Nonetheless, the bank is widely expected to reach an agreement, possibly one that includes a fine, with the watchdog later this year.
But any arrests in the criminal case will ensure that it will have a tough time moving on from the affair, as such action would keep the “London Whale” in the headlines for months to come. It could also renew questions about management practices and oversight at the bank, which just last week revealed that, in a separate and unrelated case, government lawyers were looking into the way it sold certain mortgage-backed securities in the run-up to the financial crisis.
In the Whale case, although none of the bank’s current executives or Mr Iksil are believed to be in prosecutors’ crosshairs, arrests would lead to a fresh examination of the circumstances surrounding the losses, as the authorities try to establish the culpability of Mr Martin-Artajo and Mr Grout.
The two former employees are likely to be accused of trying to mask the size of the losses stemming from the botched trades. While the specific charges remain unclear, prosecutors are said to be focusing on whether the ex-traders falsified records to understate the losses to senior bank executives in the US. Mr Iksil is reported to be co-operating with prosecutors as they prepare their case. A decision on whether or not to press charges against Mr Martin-Artajo and Mr Grout could be taken as early as this week.
Earlier this year a 300-page US Senate report into the trades found that the bank had hidden “massive losses” in its synthetic credit portfolio for “several months” last year by allowing its chief investment office, the division where Mr Iksil, Mr Martin-Artajo and Mr Grout worked, to “overstate the value of its credit derivatives”.
At the time Democrat Senator Carl Levin said: “The Whale Trades demonstrate how derivative valuation practices can be manipulated to hide losses, and how derivative risk controls can be bypassed or manipulated to conceal risk.”
The Republican lawmaker John McCain also spoke of efforts to mask the losses, saying: “JP Morgan gambled away billions of dollars through risky and exotic trades, then intentionally hid its losses from investors and the public, showing complete disregard for risk management procedures and regulatory oversight.”
To succeed in a case against the former employees, prosecutors will have to show that Mr Martin-Artajo and Mr Grout knowingly lowballed the losses, something that will be hard to prove given the lack of transparent pricing in the kinds of derivatives contracts at the centre of the case. They are likely to draw on internal communication records of instant messages and email conversations between the two men and Mr Iksil. The head of the division where the losses occurred, Ina Drew, who was based in New York as JP Morgan’s chief investment officer and considered one of the most powerful women on Wall Street, resigned from the company soon after the botched trades came to light.
As a first step, however, Mr Martin-Artajo and Mr Grout would have to be extradited to the US. Although both were based in London at the time of the losses, Mr Grout has since moved to his native France, where extradition is likely to prove a challenge for US prosecutors. His lawyer, Edward Little, said that, contrary to suggestions that his client might have moved to France to avoid prosecution, Mr Grout stopped working for JP Morgan in December and left the UK after failing to find another job in London.
“London’s an expensive place,” Mr Little told The Independent, adding that Mr Grout was not anticipating any charges when he decided to move and was vacationing in the US as recently as last month.
“He had already moved all his belongings to France two months ago,” Mr Little, a specialist in white-collar case defences at the New York law firm Hughes Hubbard & Reed, added.
A lawyer for Mr Martin-Artajo, who is Spanish, could not be reached yesterday, but Bloomberg cited his neighbour in Chipping Norton, Oxfordshire, as saying that he is currently away with his family.
A spokesman for JP Morgan declined to comment on both the settlement talks with the SEC and the possibility of arrests in the criminal investigation.
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