More than 3,000 miles from the New York headquarters of JPMorgan Chase, traders in an office building nestled near the Thames River disguised the extent of their losses as a huge bet spun out of control last year, say federal authorities.

While just two former London traders for JPMorgan were criminally charged on Wednesday, the cases intensify the scrutiny of the bank's executives in New York, where lax controls and the pressure for profits aggravated the problem.

Federal authorities outlined the breakdown in the bank's oversight in the two criminal complaints against employees Javier Martin-Artajo, a manager who oversaw the trading strategy, and Julien Grout, a low-level trader in London. The employees, accused of manipulating the books to disguise hundreds of millions of dollars in losses, operated for months with scant supervision and the impression that higher-ups of the bank supported them.

When Martin-Artajo directed Grout to record losses only in extreme circumstances, he claimed that the directive came from New York, meaning the bank’s senior management. People inside the bank dispute that notion, arguing that Martin-Artajo had taken steps to conceal his actions from superiors. Still, according to the complaint, when another bank employee queried Grout about some of his valuations, he replied, “ask management”.

The manipulation continued, said the government, even as some of the traders were sounding alarms. According to the complaints, when Grout said he was going to show a modest loss one day of about $10 million, a fraction of the true size, another trader responded: “I don’t want to know about it.”

At a news conference to announce the charges, federal authorities took aim at not only the traders, but also the bank and its top managers, including Jamie Dimon, the chief executive who originally dismissed concerns about the trades as a "tempest in a teapot" before later acknowledging that he was "dead wrong."

Perfect storm
"This was not a tempest in a teapot but rather a perfect storm of individual misconduct and inadequate internal controls," said Preet Bharara, the US attorney in New York, taking a thinly veiled swipe at Dimon's earlier assertion. April Brooks, a senior FBI official, called the bank's compliance regime "little more than a rubber stamp".

JPMorgan has declined to comment. The bank has previously noted that it overhauled its internal controls, spotted the traders’ suspicious actions and reported them to the authorities.

Yet the charges and the broader critiques of JPMorgan have dealt a blow to the reputation of the bank, the nation’s largest, once renowned for its prowess in managing risk.

The case could also foreshadow further actions as Bharara’s office continues to weigh penalties for JPMorgan over the trading blow-up that has now generated more than $6 billion (€4.5 billion) in losses. Prosecutors and the FBI are also investigating more senior executives at the bank, according to people briefed on the matter.

One executive referred to in the criminal case but neither named nor charged is Achilles Macris, who was Martin-Artajo's supervisor. Macris remains under investigation. The future of the investigation, the people said, hinges on whether Martin-Artajo and Grout decide to co-operate.

Martin-Artajo and Grout were charged with wire fraud, falsifying bank records and contributing to false regulatory filings. The government also charged them with conspiracy to commit those crimes.

Federal authorities have held talks with British authorities about extraditing the traders, according to people briefed on the matter. Yet Martin-Artajo is away from London on vacation and Grout left London this year for France.

"He has absolutely no intention of fleeing," said Grout's lawyer, Edward Little.

Martin-Artajo’s lawyers said their client was “confident that when a complete and fair reconstruction of these complex events is completed, he will be cleared of any wrongdoing.”

The US Securities and Exchange Commission (SEC), which filed parallel civil charges on Wednesday against the two traders, is also planning to take action against JPMorgan for allowing the misconduct. In an unusually aggressive stance for the agency, said the people briefed on the matter, the SEC is looking to extract an admission of wrongdoing from the bank.

The US government’s action is also notable for what it did not do: charge a third trader who came to embody the trading blow-up with the nickname “the London Whale”, called that because of the huge size of his wagers.

That trader, Bruno Iksil, has reached a so-called non-prosecution deal with authorities in New York that will spare him charges as long as he co-operates against the two former colleagues.

The charges stem 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.

The scheme to cover up losses on the bets, say the US authorities, ran from March to May of 2012. JPMorgan eventually restated its first-quarter earnings for 2012 downward by $459 million, conceding that the valuations were flawed.

The criminal charges also detailed how the traders received significant leeway to value their bets. Within the chief investment office – the unit responsible for the losses – a monitor was effectively “neither independent nor rigorous” and was staffed in London “with essentially a single employee”.

Flawed group
The problems extended to New York, where traders "steamrolled" the independent group in monthly meetings, said a former bank employee who spoke on the condition of anonymity. JPMorgan has already conceded that the group was flawed.

In the charges, federal authorities showed how the bank instilled fear in its traders. Martin-Artajo went on high alert in late January 2012, when his boss, Macris, emailed to express the need to “urgently re-evaluate” part of the trade.

In turn, said the US government, he pressured the traders to minimize the losses. And when the traders nonetheless recorded a $40 million loss on one day in March 2012, he questioned Iksil in a recorded phone call cited in the complaints: “Why did you do that”, adding “you’re losing your mind here, man”.

Martin-Artajo, according to the complaints, said Macris “told me yesterday not to do it”, referring to showing the profit and loss on the trade.

Lawyers for Martin-Artajo and Grout will argue that traders have leeway to value their derivatives bets because the actual prices might not be immediately available. Valuing the trades in the murky derivatives world, the lawyers will argue, is often guesswork.

But Martin-Artajo’s team, according to the complaint, stopped recording the value of their bet in a “middle range”, to some of the most generous possible figures. Of the 132 trading positions, according to the charges, 107 were “marked more favorably” than the mid-point.

In March 2012, after Grout “mismarked” a trade by more than $300 million, Iksil warned that the values did not seem “realistic”. According to the complaints, Grout replied via instant message: “I mean, I’m trying to keep a relatively realistic picture here.” Weeks later, he remarked: “I don’t want to show something that is too false.”

The complaints show that Iksil also expressed frustration with his boss, Martin-Artajo. In an instant message with Grout, for example, Iksil said that “that he did not know where Martin-Artajo “wants to stop, but it’s getting idiotic”.

The tension was also on display on March 30th, 2012, when Iksil and Grout estimated a loss at $200 million, even though an earlier estimate showed it was $250 million.

Unsatisfied, Martin-Artajo asked to lower it further to $150 million, according to the complaints. When Iksil balked, Martin-Artajo told him he "could leave for the day". Grout stayed late and recorded the loss at $138 million, prompting Martin-Artajo to reply: "excellent."
– (New York Times service)