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

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.

Life and Style
The new Windows 10 Start Menu
tech
News
More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete today
Arts and Entertainment
There has been a boom in ticket sales for female comics, according to an industry survey
comedyFirst national survey reveals Britain’s comedic tastes
Arts and Entertainment
Hilary North's 'How My Life Has Changed', 2001
books(and not a Buzzfeed article in sight)
PROMOTED VIDEO
Arts and Entertainment
Mystery man: Ben Affleck and Rosamund Pike in '‘Gone Girl'
films... by the director David Fincher
News
Kim Jong Un gives field guidance during his inspection of the Korean People's Army (KPA) Naval Unit 167
newsSouth Korean reports suggest rumours of a coup were unfounded
News
people'I’d rather have Fred and Rose West quote my characters on childcare'
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
stoptober... when the patch, gum and cold turkey had all faied
Travel
Bruce Chatwin's novel 'On the Black Hill' was set at The Vision Farm
travelOne of the finest one-day walks you could hope for - in Britain
Arts and Entertainment
Gay and OK: a scene from 'Pride'
filmsUS film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
News
people
Life and Style
Magic roundabouts: the gyratory system that has excited enthusiasts in Swindon
motoringJust who are the Roundabout Appreciation Society?
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
The magic of roundabouts

Lords of the rings

Just who are the Roundabout Appreciation Society?
Why do we like making lists?

Notes to self: Why do we like making lists?

Well it was good enough for Ancient Egyptians and Picasso...
Hong Kong protests: A good time to open a new restaurant?

A good time to open a new restaurant in Hong Kong?

As pro-democracy demonstrators hold firm, chef Rowley Leigh, who's in the city to open a new restaurant, says you couldn't hope to meet a nicer bunch
Paris Fashion Week: Karl Lagerfeld leads a feminist riot on 'Boulevard Chanel'

Paris Fashion Week

Lagerfeld leads a feminist riot on 'Boulevard Chanel'
Bruce Chatwin's Wales: One of the finest one-day walks in Britain

Simon Calder discovers Bruce Chatwin's Wales

One of the finest one-day walks you could hope for - in Britain
10 best children's nightwear

10 best children's nightwear

Make sure the kids stay cosy on cooler autumn nights in this selection of pjs, onesies and nighties
Manchester City vs Roma: Five things we learnt from City’s draw at the Etihad

Manchester City vs Roma

Five things we learnt from City’s Champions League draw at the Etihad
Martin Hardy: Mike Ashley must act now and end the Alan Pardew reign

Trouble on the Tyne

Ashley must act now and end Pardew's reign at Newcastle, says Martin Hardy
Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?