The US Has Charged Two Former JP Morgan Traders Over The London Whale Trading Loss

The U.S. has charged two former JP Morgan traders over the $US6 billion ‘London Whale’ trading lost in the bank’s London Chief Investment Office last year.

Charges against former managing director Javier Martin-Artajo and Julien Grout, a low-level trade, include wire fraud and conspiracy to falsify books and records.

Bruno Iksil, the trader known as ‘The London Whale’, will not be charged as he has been cooporating with authorities. Dealbook reports that federal prosectutors and the FBI have been investigating Grout and Martin-Artajo’s phone calls, e-mails and more related to this case for months. Both are out of the country.

What is at issue here is whether or not the two traders intentionally hid significant losses over the course of the months-long trade.

According the complaint, Both Grout and Martin-Artajo not only falsified books and records, he also falsified filings to the SEC — that’s because some of their “false” information about the portfolio was included in a JPM investor report (8-k).

The duo is also charged with wire fraud for giving false information to other JPM employees over e-mail and the phone starting in late March.

That’s when things really started going wrong in the portfolio.

If JP Morgan’s own internal report is accurate, then yes, it was known in Januaruy of 2012 that the portfolio in question was taking heavy losses (by April, the loss was $US2 billion) but traders seemed confident they could hedge around it.

The traders disagreed on how to deal with the bloodletting. They could either stop trading and see what the IG-9 would do, or build more hedges around it. They chose to build more hedges (pg 36 of JPM’s report):

…he…advised another Synthetic Credit Portfolio trader not to trade IG-9 because he wanted to observe its behaviour. He also advised a more senior trader of his plans, but the latter instructed him to trade because they needed to participate in the market to understand the price at which parties were actually willing to transact.

More hedging, more complexity — the portfolio kept getting bigger and bigger. As a result, the CIO got spanked in February (pg 4):

By the end of February, the Synthetic Credit Portfolio had experienced an additional $US69 million in mark-to-market losses, from approximately $US100 million (year-to-date through January) to $US169 million (year-to-date through February).

That leads you to the March false communications (by phone and e-mail) that the DOJ accuses Grout and Martin-Artajo of sending.
Grout especially had some angry phone calls with co-workers that didn’t understand why he was not showing the profits and losses in his book, and even at the end of March he insisted that the trades hadn’t been “overly aggressive.”

We’ll all find out about that soon enough.

And FYI, U.S. Attorney Preet Bharara (the funniest attorney that is not at all joking) will be having a press conference about this today at 2:00 p.m.

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