JPMorgan Execs Indicted for Book-Cooking
MANHATTAN (CN) - Federal prosecutors say two JPMorgan Chase executives cooked the books to hide losses in the credit derivatives trading portfolio that ultimately lost more than $6 billion.
Though the Synthetic Credit Portfolio (SCP), which consists of indices and tranches of indices of credit default swaps, has generated $2 billion in gross revenues since its inception in 2007, the SCP began sustaining consistent and considerable losses in the first quarter of 2012, according to the indictment.
From at least March 2012, Javier Martin-Artajo and Julien Grout allegedly conspired to disguise those losses by artificially manipulating the SCP marks.
Martin-Artajo had been a managing director at JPMorgan and the head of credit and equity trading at the bank's chief investment office. Grout was a vice president for the bank's chief investment office and an SCP trader.
They allegedly hoped in part that this would to avoid losing control of the SCP to other traders at JPMorgan.
The SCP lost approximately $130 million in January 2012 and approximately $88 million in February 2012, the Justice Department claims.
Martin-Artajo and Grout allegedly instructed head SCP trader Bruno Iksil not to report losses in the SCP unless they were tied to some identifiable market event, such as a bankruptcy filing by a company whose bonds were in the CDS index.
Iksil has entered a nonprosecution agreement, Uncle Sam noted.
The government says JPMorgan's accounting policy required CIO traders to generally mark the securities in the SCP approximately to a mid-point, which they sometimes referred to as the "crude mid," between the price at which market-makers were willing to buy or sell a security.
Grout meanwhile maintained a spreadsheet that kept track of the difference between the price that he recorded in JPMorgan's books and records, on the one hand, and the "crude mids," on the other, according to the indictment.
The difference had allegedly grown to approximately $292 million by March 15.
"In a recorded on-line chat the same day, Grout explained that he was trying to keep the marks for most of the SCP's positions 'relatively realistic,' with the marks for one particular security 'put aside,'" prosecutors said in a statement. "That is, Grout mispriced that one particular security, of which the SCP held billions of dollars' worth, by the full $292 million. The following day, Iksil told Martin-Artajo that the difference had grown to $300 million, and 'I reckon we get to 400 [million] difference very soon.' In a separate conversation, Iksil remarked to Grout that 'I don't know where he [Martin-Artajo] wants to stop, but it's getting idiotic.'"
Ignoring Iksil's instructions on how to mark the positions, Grout instead followed Martin-Artajo's mandate to continue to hide the losses, prosecutors say.
"These incorrect figures in the SCP were not only integrated into JPMorgan's books and records, but also - as Martin-Artajo and Grout were well aware - into the bank's quarterly financial filing for the first quarter of 2012 with the SEC," according to the Justice Department's statement.
JPMorgan stripped Martin-Artajo and Grout of their SCP responsibilities and their scheme was discovered in August 2012.
When the bank restated its first quarter 2012 earnings, it recognized an additional loss of $660 million in net revenue attributable to the mismarking of the SCP, prosecutors said.
Martin-Artajo, 49, a Spanish citizen, and Grout, 35, a French citizen, face 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. Convictions on all counts carry a maximum sentence of 65 years each, plus at least $5 million in fines.