Two Former JPMorgan Chase Traders Charged By the SEC
Two traders from JPMorgan Chase & Company have been charged by the Securities and Exchange Commission (SEC) with fraudulently overhauling investments that were designed to hide massive losses in the portfolios being managed by the two traders.
According to the complaint, which was filed in the US District Court for the Southern District of New York, Javier Martin-Artajo and Julien Grout, concocted and implemented a scheme to deliberately mismark hundreds of positions in order to hide the huge losses they were experiencing. Instead of following U.S. generally accepted accounting principles and JPMorgan’s own internal accounting policies, which would have required the duo to mark the positions at mid-market values, Martin-Artajo and Grout fraudulently marked the positions by maximizing their value. The mismarking scheme caused JPMorgan’s reported first quarter earnings to be overstated by $660 million, before tax expense.
Martin-Artajo and Gout worked at JPMorgan’s chief investment office (CIO) which created the portfolio known as Synthetic Credit Portfolio (SCP). The SCP was designed to act as a hedge against adverse credit events and primarily invested in credit derivative indices or tranches. When the market value of SCP’s positions began to steadily decline in early 2012 due to improving credit conditions, as well as recent changes in investment strategy, Martin-Artajo and Grout began concealing those losses by providing management with fraudulent valuations of SCP’s investments.
The complaint further alleges that Martin-Artajo directed Gout to revise the manner in which he was marking the SCP’s investments by marking them with the most aggressive end of the dealer’s bid offer spread. Allegedly, and for a period of time, Gout maintain a spreadsheet to keep track of the differences between his marks and the mid-mark prices previously used to value the SCP’s positions. By the middle of March, this spreadsheet showed that the discrepancy had grown to over $432 million. This however, was not the end of the concealment which continued into late April. Martin-Artajo further instructed Gout on March 30th, contrary to JPMorgan’s accounting policies, to wait for better prices after the close of trading in London in the hope that activity in the U.S. markets could support better marks for SCP’s positions.
According to George S. Canellos, Co-Director of the SEC’s Division of Enforcement “The trading instruments were complex but these traders had a simple rule to follow: tell the truth about their fair value,” He continued, “Yet these traders brazenly accumulated a massive position in derivatives with lax oversight, and then lied to cover up their massive losses when the market turned against them.”
In a simultaneous action, the US Attorney’s Office for the Southern District of New York today announced criminal charges against Martin-Artajo and Grout.
The SEC’s investigation is ongoing, but the complaint already filed alleges that Martin-Artajo and Grout violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1, and aided and abetted pursuant to Section 20(e) of the Exchange Act violations of Sections 13(a) and 13(b)(2)(A) and Rules 12b-20, 13a-11 and 13a-13.