MELBOURNE: 16 August 2013 - Sometimes people say or publicly agree with a glib, humorous one-liner with which they expect to amuse their listeners and disarm criticism.  Frequently this is indeed what happens and they are forgotten quickly.  However, on other occasions subsequent events mean that these glib one-liners can rebound with a vengeance.  This seems to be what is happening regarding an attempted witty one-liner that was widely quoted after a meeting in April 2012 between a group of analysts and Jamie Dimon, chief executive of JP Morgan Chase.  Mr Dimon, when commenting on the activities of JP Morgan’s Chief Investment Office (CIO), in what had become known as the JP Morgan London Whale scandal of 2012, (discussed in more detail below), agreed that media attention was a ‘..complete tempest in a teapot.’ This week those words came back to haunt Mr Dimon.  At a press conference on 15 August 2013, the Attorney for the Southern District of New York, Preet Bharara announced that charges were being laid against former JP Morgan Chase employees Javier Martin-Artajo, (a former London-based managing director and trading supervisor), and Julien Grout, (a former trader), for manipulating bank records and understating losses in the US$6.2 billion London Whale scandal.  Mr Bharara said that Mr Martin-Arjato’s and Mr Grout’s alleged lies ‘…misled investors, regulators and the public, and they constituted federal crimes…and they knowingly or recklessly, employed devices, schemes and artifices to defraud.’  Then in a stinging put-down of the April 2012 one-liner, Mr Bharara added: ‘this was not a tempest in a teapot, but rather a perfect storm of individual misconduct and inadequate internal controls.’  A rebuke to make any chief executive choke in their teacup in embarrassment.

Mr Bharara’s comments add insult to Mr Dimon’s injury, his injuries being largely financial, because due to the London Whale scandal, JP Morgan reduced his compensation in 2012 to US$11.5 million, down from $23.1 million in 2011.  Mr Dimon is unlikely to end up in the poorhouse though, because in earlier years JP Morgan paid him substantial amounts such as: US$20.8 million (2010); US$34.3 million (2007) and US$39.1 million (2006). The label London Whale was applied to the JP Morgan CIO scandal, because positions taken by JP Morgan London-based trader Mr Bruno Iksil had become so large in 2012.  Mr Iksil’s trading book was part of the Synthetic Credit Portfolio (SCP) of the CIO, which was heavily weighted in both long and short position credit default swaps and related instruments.  In its January 2013 internal review of the scandal JP Morgan itself acknowledged that it had made ‘egregious…self-inflicted mistakes’ regarding its oversight and governance of the CIO. Those mistakes are now openly acknowledged to have cost JP Morgan US$6.2 billion in losses.  It is important to note that the SCP had proven extremely profitable for JP Morgan in the past.  It had been established in 2008 to manage excess reserves, had made $1 billion profit in 2009, increased in size during 2011 from $4 billion to $51 billion, which in turn stimulated the doubling-down on losing strategies and  manipulative practices within the CIO that are at the heart of the scandal.

It is those manipulative activities in the London Whale scandal that are currently stimulating criminal charges in New York and some confusion as to who is being charged and who is not, and what those charges are or should be.  Following a US Senate Inquiry into the JP Morgan Whale Trades, US Senator Carl Levin in March 2013 had accused JP Morgan of misinforming regulators and the public about its SCP as it: ‘..piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.’ It might be expected then that when charges were formally laid regarding the scandal that all of its central characters would face trial.  This week’s events demonstrate that so far at least, this is not the case.  Media commentary on the scandal over the last year or so has largely centred on Mr Achilles Macris who managed the CIO, Ms Ina Drew who was Chief Investment Officer and Mr Bruno Iksil whom the media portrayed as The London Whale, even if obviously others within the CIO also were involved in the questionable trading activities.  Consequently some media reports expressed surprise and disappointment that the names on the Southern Districts charges sheet were Mr Martin-Artajo and Mr Grout, not Mr Iksil, Ms Drew or Mr Macris.  Indeed one commentator noted: 

‘It’s not a good time to be a mid-level employee at a major Wall Street bank.  A few weeks after Goldman Sachs’ “Fabulous” Fabrice Tourre was found guilty of securities fraud by a New York jury, JPMorgan’s Javier Martin-Artajo and Julien Grout were criminally accused by federal authorities of wire fraud and several other charges including conspiracy to commit crimes for their involvement in the London Whale case.  The most prominent figure in the whole ordeal, French trader Bruno Michel Iksil, didn’t face any charges, after having turned on his colleagues, signing a non-prosecution agreement with the United States Attorney’s Office.’

This observation may well have a ring of truth as there has been widespread bemusement that poor and pernicious organisational business practices revealed by the carnage of the Global Financial Crisis (GFC) led to only one criminal prosecution against one individual.  That of mid-lower level Goldman Sachs banker Fabrice Tourre, a prosecution that was depicted in the media as: ‘..the little fish who did not get away…’ or the SEC nailing a minnow while the whales, (in Tourre’s case Goldman Sachs), went free.

When in a federal court in Manhattan the Department of Justice (DOJ) unsealed their criminal complaints against Mr Martin-Artajo and Mr Grout they alleged falsification of books and records, wire fraud and conspiracy, as well as causing false statements to be made in JP Morgan’s filings to the Securities and Exchange Commission.  Both Mr Martin-Artajo and Mr Grout: ‘..face a maximum sentence of five years in prison on the conspiracy count, and 20 years in prison on each of the three remaining counts in the Complaints, and a fine of the greater of $5,000,000 or twice the gross gain or gross loss as to certain of the offenses.’  At the same time The United States Attorney’s Office, Southern District of New York also announced that a third trader Mr Bruno Iksil had entered into a non-prosecution cooperation agreement.

These are potentially very substantial penalties that Mr Martin-Artajo and Mr Grout face but it seems that the man popularly portrayed as the London Whale himself, Mr Iksil, has managed to avoid prosecution, presumably first by providing information to the DOJ and other investigating authorities, and with a promise in the future to provide evidence in trial proceedings.  Those proceedings will be against one of his former superiors at JP Morgan, Mr Martin-Artajo managing director of the CIO, and a more junior ex-colleague at JP Morgan, Mr Grout, whose role was to mark positions to market.  Mr Martin-Artajo is a Spanish citizen and Mr Grout is a French citizen so there may be added complications of extradition proceedings as this case proceeds.  The London Whale affair is just one of a plethora of financial scandals in the last five years that have plagued major finance centres, which have seen increasing emphasis by regulatory authorities, especially in the United States, on Deferred Prosecutions Agreements and Non Prosecutions Agreements.  In a subsequent article for the CLMR portal I will consider these most recent enforcement developments in the London Whale scandal discussed in this opinion piece, as part of an evolving law enforcement response to the complexities of regulating and enforcing the law against huge and influential systemically important financial institutions.