NEW YORK — Financial companies need to create an honest culture among employees to prevent the kind of conspiracy that enabled two former JPMorgan Chase & Co. traders in London to falsify bank records to cover up trading losses that cost the bank more than $6 billion, authorities say.
U.S. Attorney Preet Bharara made the statement at a news conference Wednesday as he announced criminal charges against Javier Martin-Artajo, 49, and Julien Grout, 35. “We live in a time when not just one bank — but one trader at one bank — can do catastrophic economic harm, in practically the blink of an eye. Recent history bears this out,” Bharara said. “And that is why prosecutors need to be even more aggressive; regulators need to be even more vigilant; and — as I’ve been saying for years now — companies themselves need to pay much closer attention to the cultures they create.”
Martin-Artajo, Grout and their co-conspirators were accused of marking up the market value of an investment portfolio to hide that it was plummeting in value. The portfolio eventually sank into an eye-popping $6 billion loss attributed for months to Bruno Iksil, a trader who became known as the “London Whale” for his location and the supersized bets he made.
Prosecutors said they had agreed not to prosecute Iksil. The deal requires him to cooperate fully with law enforcement. The “London Whale” controversy has burdened the bank for months, but the new charges shift the narrative of the tale. Iksil, whose name has long been associated with the embarrassing loss, tried to raise questions about how his colleagues were recording the trades, according to prosecutors.
Prosecutors also portrayed bank employees as knowing exactly what they were doing, not workers simply overwhelmed by complicated systems — a defense banks have mounted for missteps in the financial crisis and its aftermath.
John Alan James, executive director of the Center for Global Governance, Reporting and Regulation at Pace University’s Lubin School of Business in New York, called the case a milestone. “They’re shaking a big stick at the biggest bank in America,” he said.
Grout and Martin-Artajo were both based in London when they worked at JPMorgan. Martin-Artajo is a citizen of Spain and Grout is a citizen of France, something that could complicate the prosecution. Bharara said his office had contacted the two men’s lawyers. “We are hopeful they will do the right thing and present themselves in the United States,” he said.
Grout’s lawyers did not return multiple messages seeking comment. Martin-Artajo’s lawyers released a statement saying he was on a long-planned vacation outside the U.K. and would be returning as scheduled.
“Mr. Martin-Artajo has cooperated with every internal and external inquiry which was required of him in the U.K.,” the attorneys at Norton Rose Fulbright said. “Mr. Martin-Artajo is confident that when a complete and fair reconstruction of these complex events is completed, he will be cleared of any wrongdoing.”
Martin-Artajo supervised JPMorgan’s trading strategy in London, and Grout, his subordinate, was in charge of recording the value of the investments each day. They were charged criminally with conspiracy to falsify books and records, commit wire fraud and falsify Securities and Exchange Commission filings. They also were charged separately in an SEC civil complaint.
The charges focus on an investment portfolio whose components were supposed to be marked at their market value each day as best as the bankers could approximate. The charges say that from March to May 2012, following Martin-Artajo’s direction, Grout began using prices for the portfolio “deliberately chosen to minimize losses rather than represent fair value,” the SEC said.
Iksil, uncomfortable with Martin-Artajo’s instructions, asked Grout to keep a spreadsheet to track the difference between the manipulated prices and the actual prices, according to the Justice Department’s charges.
A JPMorgan spokesman declined to comment. The “London Whale” accusations have been a heavy burden for JPMorgan, tarnishing its reputation as a stellar risk manager and the favorite of Washington lawmakers. It has been an embarrassment for a bank that’s used to coming out ahead of its peers, forcing it to restate earnings and face bruising hearings in front of Congress.
JPMorgan, the biggest U.S. bank by assets, has so far weathered the storm. Last year, even with the trading loss, the bank pulled in its biggest annual profit ever and its stock is up by a third from its pre-”London Whale” price.
The bank has also gotten rid of top executives and taken back bonuses of some who were responsible. It has acknowledged mistakes but has been adamant that it did not try to mislead investors. But Wednesday’s charges are hardly the end. The Federal Reserve, U.S. banking regulators and the U.K. Financial Conduct Authority, among others, are also looking into the trading loss.
Sen. Carl Levin, who heads a Senate subcommittee that investigated the loss and found that key JPMorgan executives made inaccurate public statements about it, hinted Wednesday that ultimate responsibility may not end with the two London traders.
“It is important that this matter be thoroughly investigated and that all those who are determined to be responsible be held accountable,” Levin said in a statement.