Former Bankers Charged in ‘London Whale’ Case

     MANHATTAN (CN) – Two former JPMorgan Chase executives tried to conceal more than a half-billion dollars in losses tied to the “London Whale” trading scandal, the Securities and Exchange Commission claims in Federal Court.          
     Javier Martin-Artajo, 49, and Julien Grout, 35, mismarked investments in a multibillion-dollar portfolio they managed, known as the Synthetic Credit Portfolio (SCP), to conceal the mark-to-market losses, the SEC claims.
     Burno Iksil, the JPMorgan trader whose bets caused more than $6.2 billion in losses last year, is reportedly cooperating with investigators and will not face U.S. charges. He was dubbed the “London Whale” because his trading portfolio was so large.
     Martin-Artajo was one of Iksil’s bosses, and Grout reported to Martin-Artajo.
     The SCP was created as a hedge against corporate defaults and other adverse credit events, and was invested in various credit derivative indices and tranches, including two credit default swap index groups.
     The value of the investments began to decline in early 2012 due to improving credit markets and a changed investment strategy, the SEC says.
     When the decline accelerated in March 2012, “Martin-Artajo and Grout began to fraudulently mark the SCP’s investments to conceal the true extent of the mark-to-market losses from JPMorgan management,” the lawsuit states.
     JPMorgan Chase traders were required to “mark” investments to their market prices, the SEC says, meaning they had to record any changes in fair market value.
     Grout, under Martin-Artajo’s direction, “began marking the SCP away from mid-market levels, using prices deliberately chosen to minimize losses rather than represent fair value,” the SEC claims.
     By March 30, 2012, the gap between Grout’s marks and mid-market prices had grown to hundreds of millions of dollars, the SEC claims.
     “To minimize quarter-end losses, Martin-Artajo urged Grout to mark the SCP to a desired loss result significantly below estimates based on market information,” the SEC says. “And contrary to JMorgan’s policy, Martin-Artajo instructed Grout to wait for better prices after close of trading in London (where the traders were located) in the hope that trading in the U.S. markets would support more favorable marks.” (Parentheses in original.)
     “At day’s end, Grout marked the SCP to meet the desired result Martin-Artajo had requested,” the SEC claims.
     The agency says the scheme continued through April 2012.
     On the first trading day in London after media articles reported the large size of SCP’s investments, the portfolio declined by hundreds of millions of dollars.
     “Nevertheless, Martin-Artajo directed Grout to disclose to management only $5.7 million in daily mark-to-market losses — a figure that Grout disseminated but ultimately replaced later the same day with a much larger loss of $395 million,” the agency says.
     JPMorgan reported its results for the first quarter of 2012, and because of the traders’ alleged misconduct, the results overstated the firm’s consolidated income by hundreds of millions of dollars.
     A week later, JPMorgan allegedly received collateral calls of more than a half-billion dollars related to the SCP’s investments.
     “It thereafter relieved Martin-Artajo and Grout of their authority to trade and mark the SCP and reverted to marking the portfolio to mid-market prices,” the SEC says.
     After an investigation, JPMorgan announced in July 2012 that it would restate its results for the first quarter of 2012, according to the lawsuit. The restatement reduced JPMorgan’s consolidated quarterly income before income tax expense by $660 million.
     The two men face charges of conspiracy, falsifying books and records, wire fraud and filing false statements with the SEC.
     JPMorgan has declined to comment.
     The SEC plans a news conference Wednesday afternoon in lower Manhattan.
     The lawsuit comes after the SEC secured a conviction against former Vice President of Goldman Sachs Group Fabrice Tourre, who was found liable for six of seven fraud charges against him for his role in a failed mortgage deal that cost investors $1 billion.
     The SEC seeks disgorgement against Martin-Artajo and Grout, plus civil penalties.
     The lawsuit was filed by Andrew Calamari, regional director of the SEC.

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