Two former JPMorgan Chase & Co traders falsified bank records to try to cover up trading losses that were spiraling out of control, prosecutors said on Wednesday, in a criminal case that raises fresh questions about whether Wall Street learned its lessons from the 2008 financial crisis.
Javier Martin-Artajo, 49, and Julien Grout, 35, and their co-conspirators were accused of marking up the market value of an investment portfolio to hide the fact that it was plummeting in value. The portfolio eventually sank into an eye-popping US$6 billion loss attributed to Bruno Iksil, a trader who became known as the “London Whale” for his location and the supersized bets he made.
Preet Bharara, the Manhattan US attorney, hinted that the misconduct was not just the work of a couple of rogue traders, but was systemic in a bank that failed to keep adequate watch over its traders.
He said companies need to pay closer attention to the cultures they create.
“This was not a ‘tempest in a teapot,’ but rather a perfect storm of individual misconduct and inadequate internal controls,” Bharara said at a news conference — a jab at JPMorgan CEO Jamie Dimon, who once dismissed the controversy around the trading loss with that flip phrase.
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 portray 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.
Lawyers for Grout and Martin-Artajo, both based in London when they worked at JPMorgan, did not return calls for comment. Martin-Artajo is a citizen of Spain and Grout is a citizen of France, which could potentially 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.
Mitchell Epner, a former federal prosecutor who is a criminal defense attorney at Wilk Auslander in New York, said Martin-Artajo and Grout might try to mount a defense by placing the blame on their superiors.
“It would be a full and complete defense here that these people were transparent” to superiors who determined what the bank said publicly, Epner said.
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 is used to coming out ahead of its peers, forcing it to restate earnings and face bruising hearings in front of Congress.
Wednesday’s charges are hardly the end: The US Federal Reserve, US banking regulators and the UK Financial Conduct Authority, among others, are also looking into the trading loss.
US Senator Carl Levin, who heads a Senate subcommittee that investigated the loss and found that key JPMorgan executives made inaccurate public statements about it, hinted on 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.