U.S. prosecutors have charged two former JPMorgan Chase employees, Javier Martin-Artajo and Julien Grout, for their role in the "London Whale" scandal.
The charges are a milestone in the government's response to what has been an embarrassing and costly episode for the biggest U.S. bank, which still faces the prospect of civil charges. But it once again places the heaviest legal burden on players fairly low in the bank's hierarchy. The bank and its top executives will likely suffer relatively small financial penalties, at worst.
In criminal complaints unsealed on Wednesday morning, the Justice Department accused Martin-Artajo and Grout of falsifying books and records, wire fraud and falsifying regulatory filings about bad trades in credit derivatives last year that cost JPMorgan more than $6.2 billion in losses. The FBI said it wants to arrest both men, who were also charged with conspiracy. Arrests could be challenging, as both men are in Europe and out of the reach of U.S. law enforcement at the moment.
"The defendants deliberately and repeatedly lied about the fair value of assets on JPMorgan's books in order to cover up massive losses that mounted up month after month," Preet Bharara, the U.S. Attorney for the Southern District of New York, said in a press conference announcing the charges. "Those lies misled investors, regulators and the public, and they constituted federal crimes."
Separately, the Justice Department said another former JPMorgan employee, Bruno Iksil, the trader who was actually known as the London Whale, had entered a "non-prosecution cooperation agreement," which Bharara acknowledged was a rare step. The government agreed not to prosecute Iksil as long as he cooperates and testifies truthfully about the trades and the alleged cover-up. Iksil has been helping the government build its case against other former JPMorgan employees, the Wall Street Journal reported on Tuesday. Bharara noted that Iksil "did sound the alarm more than once" within the bank about trading losses.
The lawyers representing Grout and Martin-Artajo have previously said the two did nothing wrong, according to Reuters. A spokesman for JPMorgan declined to comment to Reuters on the case.
Martin-Artajo was in charge of credit trading at the London office of a unit at JPMorgan known as the Chief Investment Office, which manages the bank's own money. He was Iksil's direct supervisor, while Grout was a junior trader who reported to Iksil. According to the Justice Department, both men conspired to hide hundreds of millions of dollars in losses the bank was taking large and risky bets on credit default swaps.
Not facing charges on Wednesday was the former superior of all three of these men, Achilles Macris, who at the time ran the London office and designed the trading strategy that ultimately cost the bank. Also not charged was Macris's former boss, Ina Drew, who ran the CIO at the time. Drew, a respected bank veteran, retired shortly after the scandal erupted, and she later gave back two years' pay.
CEO and Chairman Jamie Dimon had his pay cut in half this year, to about $11.5 million, as a result of the scandal -- although shareholders recently allowed him to keep both of his titles at the bank, despite the London Whale scandal and a raft of other regulatory headaches that have cost the bank at least $7 billion in additional penalties in recent years.
The charges against Martin-Artajo and Grout follow the recent civil trial of former mid-level Goldman Sachs banker Fabrice Tourre, who was found liable for fraud in selling toxic mortgage securities ahead of the financial crisis. Though the government probably enjoys the appearance of getting tough with Wall Street after years of going easy on it, so far that toughness has gone only so high up the chain of command.
"Two arrests are a good start, but it must be the beginning of a major change at the Department of Justice and the SEC where they finally apply the law without fear or favor to the wealthy, powerful and well-connected of Wall Street," Dennis Kelleher, CEO of Better Markets, a nonprofit group advocating financial reform, wrote in a statement. "All eyes are on the next moves by DOJ and the SEC. Are they going to just arrest minnows or are they also going after the law-breaking whales that made the key decisions, disclosures and public statements?”
When news first broke in the spring of 2012 that JPMorgan's previously staid CIO had taken big and risky trading positions, the bank was dismissive. Dimon, in a conference call with investors, infamously called the story "a tempest in a teapot." Chief Financial Officer Douglas Braunstein said the CIO's trades had been vetted by risk managers. When the scope of the trade and its losses became too large to ignore, the bank admitted it had failed to keep an eye on the CIO's positions. The bank also said it had been misled by some of its employees as to the size of the losses.
The Securities and Exchange Commission is reportedly working on a settlement with the bank that could involve JPMorgan admitting some kind of fault. That would be a break from a long tradition of allowing banks to settle charges without admitting or denying wrongdoing.
During the press conference, Bharara heavily criticized the bank's culture and even mocked Dimon a bit:
"This was not a tempest in a teapot, but rather a perfect storm of individual misconduct and inadequate internal controls," Bharara said.
But the bank is reportedly unlikely to face criminal charges. Gentle mockery will have to do, apparently.