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From Banking and Finance Law Daily, August 14, 2013

Two JPMorgan bankers charged in London whale scheme

By Anne Sherry, J.D.

Criminal charges leveled against Javier Martin-Artajo and Julien Grout allege that the former London-based employees of JPMorgan Chase & Company conspired to hide more than $500 million in losses in a credit derivatives trading portfolio maintained by JPMorgan’s Chief Investment Office (CIO) that ultimately lost over $6 billion. Bruno Iksil, the “London whale” who made the trades, was not charged; the Wall Street Journal reports that he has made a deal with federal authorities to avoid prosecution. In a parallel civil complaint filed today against Martin-Artajo and Grout, the SEC seeks permanent injunctions and monetary remedies (U.S. v. Martin-Artajo and U.S. v. Grout, August 9, 2013).

Allegations. The criminal charges describe a conspiracy in which the defendants concealed massive losses in the CIO’s Synthetic Credit Portfolio (SCP) by inflating the value of position marks to achieve specific profit and loss objectives. In July 2012, JPMorgan announced in a Form 8-K that it would restate its quarterly results for net revenue by $660 million. The write-down was entirely attributable to the SCP and included position marks that the defendants and others manipulated, according to the charges. JPMorgan’s formal restatement in August 2012 stated that 107 of the 132 positions within the SCP were marked more favorably than the mid-market price at the end of the first quarter of 2012.

Martin-Artajo, a Spanish citizen, and Grout, a French citizen, are charged with one count of conspiracy; one count of falsifying the books and records of JPMorgan; one count of wire fraud; and one count of causing false statements to be made in JPMorgan’s filings with the SEC. They each face a maximum sentence of five years in prison on the conspiracy count, 20 years in prison on each of the three remaining counts, and a fine of the greater of $5 million or twice the gross gain or gross loss as to certain of the offenses.

Prosecution. The case was investigated by the FBI with the involvement of the SEC and the Justice Department’s Office of International Affairs. U.S. Attorney for the Southern District of New York Preet Bharara described the defendants’ conduct as “a perfect storm of individual misconduct and inadequate internal controls.” George Venizelos, Assistant Director-in-Charge of the FBI’s New York Field Office, said, “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. … It brought a whole new meaning to cooking the books.” U.S. Attorney General Eric Holder promised, “We will not stop pursuing those who violate the public trust and compromise the integrity of our markets.”

Parallel civil complaint. The SEC announced today that it has filed a parallel civil complaint against Martin-Artajo and Grout in the Southern District of New York. The complaint, which involves the same conduct as the criminal prosecution, alleges violations of Exchange Act Sections 10(b) and 13(b)(5) and associated rules and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) and associated rules (SEC v. Martin-Artajo, August 14, 2013).

George S. Canellos, Co-Director of the SEC’s Division of Enforcement, said, “The trading instruments were complex but these traders had a simple rule to follow: tell the truth about their fair value. Yet these traders brazenly accumulated a massive position in derivatives with lax oversight, and then lied to cover up their massive losses when the market turned against them.” The complaint requests permanent injunctions, disgorgement with prejudgment interest, and civil monetary penalties.

The cases are No. 13 MAG 1975, No. 13 MAG 1976, and No. 13 CV 5677.

Attorneys: Eugene Edward Ingoglia for the United States. Andrew Calamari for SEC.

Companies: JPMorgan Chase & Company

LitigationEnforcement: BankingOperations EnforcementActions NewYorkNews SecuritiesDerivatives

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