Neither Javier Martin-Artajo nor Julien Grout were the so-called “London Whale”, yet they are the two former traders in the JP Morgan Chief Investment Office (CIO) that have been charged for various offenses related to the $US6 billion loss that rocked the House of Dimon last year. The question is why?
First thing’s first, Bruno Iksil, the man known as the ‘London Whale’ has been talking to prosecutors about what happened in the CIO for months, and cut a deal to avoid prosecution. That leaves other traders in the CIO that managed the portfolio of synthetic dervitives in question to take the fall.
Grout and Artajo are two such traders — both are charged with wire fraud, conspiracy to falsify books and records, and falsifying records to the SEC.
According to the Department of Justice’s complaint, the wire fraud charges stem from e-mails and phone calls starting around the end of March 2012, in which the two traders talked about their position in CIO’s synthetic credit portfolio. It was at this point that it was clear that the portfolio was losing a ton of money, and they were definitely freaking out.
Now, it’s not illegal to lose money — which U.S. Attorney Preet Bharara pointed out in his press conference today — it’s how these two traders allegedly tried to cover their losses that Bharara called “not a tempest in a teapot…but a perfect storm.”
For months in 2012, as the portfolio started losing millions of dollars ($US130 million in January and $US88 million in February) traders in the CIO thought they could hedge their way out of the hole they’d dug themselves into.
To be able to do that, according to the Department of Justice’s complaint, they hid their losses from their superiors and kept two separate accounts of the portfolio — one that had the fair value of the derivatives that they were trading, and another rosier account that did not.
By March 15, 2012, said Bharara, the difference between those two books was $US292 million.
According to the complaint, a day later some of Martin-Artajo and Grout’s co-workers (one co-conspirator named as “CC-1” and someone who entered a non-prosecution with the U.S. Attorney named as “CW-1”) were asking Martin-Artajo to make the two books public. He wouldn’t.
Two things to keep in mind here. First, by April, when the losses in the CIO became public, the hole had widened to $US2 billion — so even without the $US292 million difference, there had to be something wacky going on in the portfolio Martin-Artajo and Grout were presenting (thus the freak-out phone calls in late March).
Another thing to keep in mind here is that the CIO is supposed to be reinvesting the bank’s excess deposits — so at that point $US350 million worth of un-loaned JP Morgan customer money. That’s doubly uncool to regulators.
According to this narrative, the bank didn’t know the extent of the damage that had been done because there were allegedly two separate accounts of this specific portfolio. As a result, when the bank released an 8-K earnings release it was inaccurate. That’s where you get the “falsifying records to the SEC” charge.
From the complaint against Grout (the language in both complaints is similar):
And that’s where you get why these two sort of random guys are having the book thrown at them.