Federal authorities announced criminal charges on Wednesday against two former JPMorgan Chase & Co. employees accused of disguising losses on a trade that spun out of control last year, a rare show of government force against Wall Street risk-taking.
The former JPMorgan employees — Javier Martin-Artajo, a manager who oversaw the trading strategy, and Julien Grout, a low-level trader in London — were charged with wire fraud, falsifying bank records, and contributing to false regulatory records. The government also charged them with conspiracy to commit those crimes.
Federal prosecutors and the FBI in New York spent more than a year investigating Martin-Artajo and Grout in connection with their roles in JPMorgan’s losses. Ultimately, the authorities concluded that the traders artificially increased the value of their bets in order to hide the extent of hundreds of millions of dollars of losses.
“I’m a trader,” Martin-Artajo told a bank executive on one of several recorded calls the government highlighted in the charges. “I do not mark books to US” accounting rules.
The charges on reflect the government’s increasingly aggressive stance toward Wall Street. After the financial crisis, authorities came under fire for charging only a few bank employees, and no executives, with wrongdoing.
The Securities and Exchange Commission, which is also planning to take action against JPMorgan for allowing the misconduct, filed parallel civil charges on Wednesday against the two traders.
Yet the government’s action is also notable for what it did not do: charge a third trader who came to embody the soured bets. The trader, Bruno Iksil, has reached a so-called nonprosecution deal with authorities, according to people briefed on the matter who spoke on the condition of anonymity. Referred to in the charges as a cooperating witness but known publicly as the “London Whale” for his role in the outsize bets, Iksil will not face charges as long as he cooperates against his two former colleagues, the sources said.
The criminal and civil complaints against his colleagues provide the most detailed account of the effort to hide the trading losses and the bank’s failure to thwart such actions. Even after JPMorgan published an internal investigation of the losses and a congressional committee exposed the bank’s sharp-elbowed response to regulators, the charges for the first time spotlight how breakdowns in the bank’s controls and pressure from senior executives exacerbated the problem.
For example, when Martin-Artajo directed Grout and Iksil to record losses only in extreme circumstances, he explained that the directive came from New York, meaning the bank’s senior management. And when a bank employee queried Grout about some of his valuations, he replied, “Ask management.”
The case stems from a bet the traders built over years. Deploying derivatives — complex financial tools with values linked to an asset like a corporate bond — the traders made bets on the health of large corporations.
Those bets, which roiled the market, began to sour last year. The losses, which JPMorgan disclosed last May, have since swelled to more than $6 billion.
The scheme to cover up the losses, the government says, spanned from March to May of 2012. JPMorgan restated its first-quarter earnings for 2012, adjusting them down by $459 million to concede that the valuations were flawed. The bank also reported the traders’ suspicious valuations to authorities.
Federal authorities have held talks with British authorities about extraditing the traders, according to the people briefed on the matter. Yet it is unclear when authorities will seek to arrest the men.
Grout’s lawyer, Edward Little, said Grout left London after losing his job with JPMorgan in December.
Martin-Artajo’s lawyers said their client “is confident that when a complete and fair reconstruction of these complex events is completed, he will be cleared of any wrongdoing.”