US Will Likely Arrest Two Ex-JPMorgan Chase Employees Over Trading Losses Related to the London Whale Debacle

The United States Government is expected to announce criminal charges against two ex-JPMorgan Chase & Co. (JPM) employees over allegations that they tried to cover up trading losses last year related to the London Whale fiasco. The ex-employees are Javier Martin-Artajo, the executive who was in charge of supervising the trading strategy, and Julien Grout, a trader that worked under him. Prosecutors also may impose penalties on the investment bank over this matter.

The securities fraud allegations stem from a probe into whether JPMorgan employees at its London offices tried to inflate certain trades’ values on the banks’ books, and charges could be filed over the falsification of documents and the mismarking of books. The criminal probe also has looked at whether the firm’s London traders engaged in the type of market manipulation that let them inflate their own positions’ value.

JPMorgan first revealed the losses at the London office May 2012. The trades were made by Bruno Iksil, dubbed the London Whale because of the vastness of his holdings. The bank would go on to lose over $6.2 billion when the trades failed. Other traders also were purportedly involved. They used derivatives to bet on the health of huge corporations.

Martin-Artajo oversaw Iksil, while Grout helped the latter value his trading book. The bank fired all three men last year, while several senior executives were reassigned or left the bank. CEO Jamie Dimon suffered a 50% pay cut.

Meantime, The FBI and the US Justice Department also have been investigating the trading loss, with prosecutors obtaining Iksil’s help. Reuters says that Iksil will not be charged.

Also, JPMorgan is working on a deal with the SEC for the latter to end its probe into the trading loss. However, according to a source, the agreement still could include allegations of failures to supervise, execute proper controls, share information internally, and other claims, and the firm could be reprimanded and ordered to pay a fine. The New York Times is reporting that the regulator wants the firm to admit wrongdoing, which is a departure from the SEC’s general “neither admit nor deny wrongdoing,” policy. The Commission has been trying to hold firms and their representatives more accountable in certain cases, especially in the wake of concerns that they get off too easily when it comes to financial fraud and other wrongdoings.

All of this comes five months after a Senate subcommittee published a 301-page report accusing the bank of hiding losses, misleading investors, and fooling regulators. In Britain, the Financial Conduct Authority also intends to fine JPMorgan.

Following the London Whale scandal, the bank has reworked its controls. It also began its own probe into the trades, giving over its findings to the Senate and federal authorities.

Last year’s trading loss brouhaha is not the only regulatory matter JPMorgan is dealing with. It is facing inquiries from two European countries, a state regulator, and several federal agencies here. Authorities also are looking at JPMorgan in connection with its mortgage business during the financial crisis and whether there are problems with its debt collection practices.

U.S. Said to Plan Charges Against Ex-JPMorgan Employees, Bloomberg, August 12, 2013

U.S. Said to Plan to Arrest Pair in Big Bank Loss
, The New York Times, August 9, 2013

More Blog Posts:

JPMorgan Chase Ordered to Remedy Risk Management Breakdowns Involving “London Whale” Trades, Institutional Investor Securities Blog, January 17, 2013

Police Retirement System of St. Louis Also Suing JPMorgan Chase Executives Over “London Whale” Scandal, Institutional Investor Securities Blog, April 25, 2013

California AG Files Lawsuit Against JP Morgan Chase Alleging Debt Collection Abuse Over 100,000 Credit Card Cases, Stockbroker Fraud Blog, May 16, 2013