Federal authorities announced criminal charges on Wednesday against two former JPMorgan Chase 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 City spent more than a year investigating Martin-Artajo and Grout in connection with their roles in JPMorgan’s loss. Ultimately, the authorities concluded that the traders “artificially increased” the value of their bets “in order to hide the true 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 U.S.” accounting rules.
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The charges on Wednesday reflect the government’s increasingly aggressive stance toward Wall Street. In the wake of 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 in Manhattan, according to the 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 people said.
The criminal and civil charges against his colleagues, replete with dozens of emails and previously unreleased phone calls, 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 criminal charges for the first time spotlighted how breakdowns in the bank’s controls and pressure from senior executives exacerbated the problem.
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 like American Airlines.
Those bets, which roiled the market, began to sour last year. The losses, which JPMorgan initially disclosed last May, have since swelled to more than $6 billion.