USAO Moves To Dismiss Charges Related To London Whale

The saga of the London Whale appears to be drawing to a close. The Manhattan U.S. Attorney’s Office moved to dismiss charges against two former JP Morgan derivatives traders who were colleagues of Bruno Iksil, the London whale. Javier Martin-Artijo, Managing Director and Head of Credit and Equity Trading for the Chief Investment Office, and Julien Grout, Vice President and derivatives trader in the CIO, were charged with conspiracy to conceal certain trading losses, false books and records, wire fraud and false filings with the SEC. U.S. v. Martin-Artago, 13 Mag 1975 (S.D. N.Y. Filed August 14, 2013); U.S. v. Grout, 13 Mag. 1976 (S.D.N.Y. Filed August 14, 2013).

In requesting dismissal the government noted that on April 23, 2015 a court in Spain rejected a request to extradite Mr. Martin-Artajo. Previously, a determination had been made that attempts to extradite Mr. Grout from France would have been futile. In addition, the charges were based in part on the ability of the government to call Mr. Iksil as a witness. Based on recent statements and writings by Mr. Iksil the government no longer believes it can rely on his testimony in prosecuting the case even if the defendants appear.

The charges centered on trading for a portfolio known as the Synthetic Credit Portfolio. The portfolio had been used to manage the bank’s excess deposits since 2007. It was created by the bank’s Chief Investment Officer as a hedge against adverse credit events. The portfolio invested in various credit derivative indices and tranches. The positions in the portfolio had to be marked to the market at fair market value each day. While the positions were historically difficult to value, JP Morgan’s policy called for them to be marked at the mid-point between the price at which the market-makers were willing to buy or sell a security.

In early 2012 the investments in the portfolio began to decline in value as the market moved against the positions. As the value of the portfolio declined, the defendants sought to conceal the increasing losses by ignoring the bank’s historic valuation methods, although they kept a spread sheet showing those values. The losses continued and eventually required the bank, which incorporated the values into its books and records, to restate its quarterly financial statements to show a pre-tax loss of $660 million. The SEC brought parallel civil actions cited above. SEC v. Martin-Artago, Civil Action No. 13-cv-5677 (S.D.N.Y. Filed August 14, 2013).