By Emily Flitter
NEW YORK (Reuters) - Two former JPMorgan Chase & Co
In fact, Bruno Iksil, who is cooperating with federal prosecutors, pushed back against the efforts of his former colleagues Javier Martin-Artajo and Julien Grout to hide the mounting losses, according to court filings.
Federal prosecutors in Manhattan on Wednesday charged Martin-Artajo and Grout, who both worked for JPMorgan's chief investment office in London, with wire fraud and a conspiracy to falsify books and records related to the trading losses.
The charges, the first to arise from the Whale scandal, say the two deliberately tried to hide hundreds of millions of dollars in losses on trades in a portfolio of synthetic credit derivatives tied to corporate debt. Manhattan U.S. Attorney Preet Bharara said the incident shows how much damage a small group of traders can do to a major bank.
Losses from the trades, which were made in the London division of JPMorgan's chief investment office, first became public in April 2012 in a media report about the squeeze put on Iksil's group by competitors in the market.
"This was not a tempest in a teapot, but rather a perfect storm of individual misconduct and inadequate internal controls," said Bharara at a press conference announcing the charges. He was referring to a comment made by JPMorgan CEO Jamie Dimon who initially dismissed the losses as a "tempest in a teapot," a comment which would come back to haunt the man who run's the nation's largest bank.
It is not clear when Martin-Artajo and Grout, who are both living in Europe, will be arrested and brought to the U.S. to be formally arraigned. It is not clear if the men will be extradited to New York or will voluntarily turn themselves in.
"We hope they'll do the right thing and face the charges," Bharara said, adding the U.S. would pursue extradition if it was necessary.
Lawyers for Grout and Martin-Artajo, who could not be immediately reached for comment, have previously said that their clients did nothing wrong.
Iksil earned the nickname "the London Whale" for the size of the derivatives trades he made in late 2011 and early 2012. Though initially blamed for the bad decisions leading to the losses, the charges against his former colleagues are now casting him in a more heroic light, at least according to federal authorities.
Iksil emerges in the criminal complaints as a pivotal voice during the escalating scandal, a dissenter who wanted to quickly exit the unwieldy trading positions and who at times tried to argue against hiding the group's mounting losses.
DOWN-PLAYING LOSSES
The criminal complaints include references to several conversations and email exchanges in which Iksil tells Grout he takes issue with Martin-Artajo's instructions to minimize reported losses. In a conversation on March 16, 2012, authorities quote Iksil as telling Grout: "I don't know where he (Martin-Artajo) wants to stop, but it's getting idiotic."
On March 30, according to the charging documents, Martin-Artajo asked Grout to report losses of only $200 million, even though Grout had estimated the day's losses as being $250 million. They eventually whittled the losses down even further, to $150 million and then to $138 million, before Grout eventually filed the price report late that evening.
Just a few weeks later, in a conversation with Iksil, Grout ruminated on how to report more losses on the portfolio without igniting a firestorm among the bank's upper managers. He appeared to want to downplay the loss amounts while keeping them realistic.
"I don't want to show something that is too false," Grout said.
Grout, 35, was Iksil's deputy and was in charge of marking the values of the trades in the group's books.
Martin-Artajo, 49, was Iksil's direct boss in the chief investment office. Prosecutors accuse him of pressuring Iksil and Grout to report prices at more favorable levels, according to the court papers.
JPMorgan had to scramble to unwind Iksil's derivatives positions after they came to light. The loss tainted the reputation of the bank and of Dimon, and led to calls for greater oversight. It also highlighted the scale of the bank's risk-taking activities.
Critics said JPMorgan should not have been able to engage in such risky behavior while it engaged in commercial banking.
The complaint against Martin-Artajo alleges he also manipulated the single person who is not named in the complaint, whose role it was to independently review the prices of trading positions marked in the chief investment office's books. "The defendant and his co-conspirators took full advantage of the freedom" offered by the unnamed person's flimsily structured office, called the "valuation control group," the complaint said.
The complaint said Martin-Artajo and his team did this by talking to the valuation control group employee and sharing with him only selected price quotes they had received "with the result that the CIO VCG ultimately did not perform a meaningful check on the trader valuations."
The two men each face charges of conspiracy, falsifying books and records, wire fraud, and causing false statements to be made to the U.S. Securities and Exchange Commission. They may face up to 25 years each in prison.
The maximum fines for their charges are $250,000 each, or twice the gross gain or loss from the offenses.
The U.S. Securities and Exchange Commission filed a related civil complaint against Martin-Artajo and Grout.
It said the defendants hid losses to make the portfolio's performance look better, and as a result curry favor with supervisors and improve their bonuses and promotion prospects.
The SEC said Martin-Artajo also hoped to stop JPMorgan from moving the portfolio, one of his main responsibilities, to another division.
A spokesman for JPMorgan declined to comment.
Iksil will not face criminal charges, according to the cooperation agreement, which was signed on June 20. His testimony helped build the cases against his former colleagues; he appears in both sets of charges as "cw-1," an unnamed cooperating witness.
Iksil was fired along with Martin-Artajo last year, as the scandal surrounding the bank's losses escalated.
It was not clear when Grout and Martin-Artajo would appear in U.S. court to face the charges against them. They were both based in London when they worked for JPMorgan.
Martin-Artajo, who is Spanish, still lives in London but is traveling abroad on a summer vacation.
Grout, who is French but has an American wife and two children who are U.S. citizens, was forced to resign from JPMorgan in December. He and his family are living in France with his parents.
(Reporting by Emily Flitter; Additional reporting by Bernard Vaughan, Jonathan Stempel and David Henry; Editing by Matthew Goldstein, Gerald E. McCormick, Lisa Von Ahn and Bernard Orr)
