A new article up at the Wall Street Journal blares, “J.P. Morgan Still Faces Criminal Investigation for ‘Whale’ Trades.” This headline is narrowly accurate and shows some refreshing tough-mindedness among regulators in how they are negotiating with JP Morgan over its London Whale trades. As we detailed in a series of posts at the time, what was particularly disturbing about the episode was the clear evidence that JP Morgan had risk controls that were way way short of industry standards, that the bank was abusing the special accounting latitude of its Treasury by locating a huge prop trading operation in it, and bank executives, including Dimon himself, lied flagrantly to the media about the nature and severity of the case for a troublingly long time after it became public. And we learned later that the bank was exceptionally high-handed and dishonest in its dealings with regulators (one prize was “dog ate my homework” refusals to send on key reports).
So the Journal encouragingly reports that the parties involved in the negotiations are refusing to give JP Morgan a global settlement for the London Whale incident. The FBI and the Manhattan prosecutor’s office are still investigating criminal charges and the CFTC is continuing with its own probe.
As much as this keeps JP Morgan in the crosshairs, the article also reports that, contrary to the hopes of the investigators, the employees that have been indicted so far aren’t cooperating in the typical prosecution strategy, which is to charge lower level staff and then cut a plea bargain in return for them providing testimony against the higher ups. Recall that we surmised that was the approach the SEC tried in the Abacus trades (admittedly with civil rather than criminal charges) in suing Fabrice Tourre in an action separate from that of Goldman.
Unfortunately, so far for the officialdom, it looks like the code of omerta is alive and well in the financial services industry. As the Journal tells us:
At this point, it still appears that the settlement will be limited to four regulatory agencies: the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve and the U.K. Financial Conduct Authority. J.P. Morgan’s final tally for penalties in the case is likely to go higher before the case is ultimately wrapped up.
Last month, U.S. prosecutors charged Julien Grout and Javier Martin-Artajo, two former traders at the bank, with conspiracy and fraud for allegedly covering up the losses in the trades. On Monday, a grand jury indicted both men….
Mr. Grout is in France and Mr. Martin-Artajo is in Spain. Law enforcement officials believe it is highly unlikely that Mr. Grout will be extradited from France, according to a person briefed on the investigation. There is a higher chance that Spain might extradite Mr. Martin-Artajo, this person said…
According to a person briefed on the matter, investigators had hoped Messrs. Grout and Martin-Artajo would cooperate with the investigation and provide information on higher up executives at the bank. But now that those men are fighting attempts by law enforcement to bring them to the U.S. to face the charges, investigators are worried their value as witnesses has diminished.
Testimony from the men, this person said, would be less valuable now without documents to corroborate their story. It is also possible, this person said, that the men simply don’t have any incriminating information about the actions of their higher-ups. No other individuals at J.P. Morgan have been accused of wrongdoing.
The reality is if the authorities can’t extradite its targets, its indictments are a big wet noodle. The flip side is that the talk of their testimony having little value seems questionable, but it may reflect how dependent prosecutors have become on the “smoking gun” strategy of presenting jurors with clear proofs of misrepresentations (which are often damning e-mails) to cut through the miasma that the defense likes to create in complex financial cases (a confused jury is unlikely to find that evidence met the needed “beyond a reasonable doubt” standard required for conviction).
The fact is that Martin-Artajo was pretty senior at JP Morgan. If he were extradited and he thought he actually might lose a case and therefore cooperated with the prosecution, I’d be worried if I were JP Morgan. As we’ve indicated repeatedly, there is a compelling Sarbanes Oxley case agains JP Morgan for its wildly deficient risk controls. Sarbox allows for both civil and criminal charges to be filed. Martin-Artajo was privy to JP Morgan’s routines and practices. Cataloguing how they stood versus proper practice (such as locating risk control for the CIO in the CIO, a structure that compliance officials I’ve spoken to see as obviously unacceptable) would paint a very ugly picture, and one that jurors would not find hard to comprehend.
So while JP Morgan looks to have limited exposure to a successful prosecution at this juncture, to revert to cliche, the jury is still out. If Martin-Artajo is extradited, it could blow the investigation wide open. Stay tuned.