"London Whale" will testify against colleagues

gavelandscales

Bruno Iksil, the JP Morgan trader known as the "London Whale", has agreed to testify against his colleagues in the bank's chief investment office (CIO) as US authorities release criminal and civil charges against them.

Javier Martin-Artajo, head of credit and equity trading within the CIO, and Julien Grout, a CIO synthetic credit trader, face federal criminal charges of conspiracy, wire fraud, false bookkeeping and false filing with the US Securities and Exchange Commission (SEC). Martin-Arajo was reportedly arrested by Spanish police in Madrid in late August, and has reportedly refused to comply with a US request for extradition; Grout remains at large in France, a country which does not generally extradite its own citizens. The SEC has also brought civil charges of Securities Act violations. Both criminal and civil charges relate to the events of early 2012, leading up to the point at which JP Morgan was forced to report hitherto-undisclosed multi-billion-dollar trading losses in a restatement of its results in July that year.

The names of three former JP Morgan employees, however, are missing from the charges. The charges against both Grout and Martin-Artajo refer to an unnamed "co-operating witness" within the bank as "CW-1". CW-1 was "the head trader of the synthetic credit portfolio and reported to Javier Martin-Artajo", the charges state – the post occupied by Iksil, who signed an agreement to co-operate in exchange for immunity on June 21. In the charges, CW-1/Iksil is described as coming under pressure from Martin-Artajo to minimise the losses that the portfolio was making, and repeatedly passing on his instructions to Grout to alter reported profit and loss to conceal the office's rocketing losses. But, the charges say, Iksil "was uncomfortable following the direction from [Martin-Artajo] not to report losses for more than a brief period of time", and had described the continued efforts to hide more than $300 million in losses as "idiotic" in an online chat with Grout.

The second missing name is that of Achilles Macris, the European head of the CIO. Macris, Iksil and Martin-Artajo left the bank in July, after an internal review of the events leading up to the $5.8 billion losses (according to JP Morgan sources), and all three, plus Grout, were named as central figures in the losses by a 2013 US Senate Permanent Subcommittee on Investigations report. But no charges have yet been placed against Macris.

The third name, that of former CIO head Ina Drew, is also missing – though Drew is referred to in both charges as the source of "concern" and "pressure" to improve CIO performance.

However, the details of the charges against Martin-Artajo and Grout imply strongly that further charges – of more senior traders – may follow soon. Martin-Artajo is prepared to implicate Drew in the fraud, according to the Federal Bureau of Investigation (FBI). April Brooks, the special agent in charge of the FBI's New York office, commented yesterday: "Martin-Artajo not only approved of this, he alleged that the bank's chief investment officer also supported the reckless behaviour."

And the charges also note that Martin-Artajo was under "continuous and increasing pressure" to improve the credit portfolio's performance from his direct superior (presumably Macris). His superior, Martin-Artajo said, also told him "that he didn't want to show the loss until we know what we are going to do" at a meeting with Drew.

From an initial story of losses caused by a failed and poorly supervised trading strategy, exacerbated by the shift to new capital calculation rules, the saga of the London Whale then became a cautionary tale about the weaknesses of oversight and management failure, or a warning of the dangers of model risk. It has now become a criminal case. 

The details in the charges also echo many of the failings identified in previous cases of fraud, notably the 2011 UBS rogue trader Kweku Adoboli. As with Adoboli, much of the evidence in the charges against Martin-Artajo and Grout is drawn from recorded conversations via email or online chat, which in places appear to rise to the level of explicit admissions of criminal conduct. And the weakness of independent oversight is also a repeated theme, with a single employee of the bank's Valuation Control Group responsible for CIO oversight in London – "in practice", the charges say, oversight "was neither independent nor rigorous".

"Compliance over the bank's synthetic portfolio was little more than a rubber stamp. It was compliance in name only. JP Morgan's Valuation Control Group relied on market views and price quotes from the very group of traders they were supposed to be overseeing," Brooks commented.

JP Morgan may also now face a class-action lawsuit over the London Whale losses - six pension funds, led by Swedish fund AP7, have reportedly filed suit against the bank, alleging that its coverup of risky trading practices implicated the bank in investment losses. Judge George Daniels, in the US District Court for New York, ruled that the funds' claims should be consolidated into a class action on August 21.

 

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