Pending JP Morgan Settlement on Whale Trades Leaves Criminal Investigation Open

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.

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    1. Yves Smith Post author

      No, that’s not a typo.

      Audit and control functions need to be independent of (as in outside, at the corporate level) to have any clout. Risk control is a corporate level function at a major financial firm….but at JPM, the risk control for the CIO was indeed housed in the CIO and reported to Ina Drew.

  1. Susan the other

    Interesting. In view of the present situation with international banks – that they are operating internationally without international regulations – extradition might well rest on just show much their country hates banksters. I’d be willing to bet that both Spain and France hate the banksters mucho beaucoup. Death by a thousand well deserved cuts for JPM.

  2. Dean

    Does anyone know of *any* successful Sarbanes/Oxley prosecutions (heck, I’ll even take an indictment) relating to the CEO/CFO certification of internal controls?

    1. Yves Smith Post author

      No, and we’ve written about this a ton. This is precisely what Sarbox was meant to address (“I’m the CEO and I know nothing/am not responsible”). It’s a weapon that no one has seen fit to use.

      1. Dean


        A post on your thoughts as to why would be well received (by me at least). Is it a lack of political will? To complex a case for a jury of non-experts? Forgotten by the prosecutors and attorneys deep in the bureaucracies?

        If the ‘be all/end all’ legislation to root out financial fraud was Sarbanes Oxley, how likely is Dodd/Frank the ‘be all/end all’ legislation to reign in banks?

      1. s spade

        The job description calls for a patsy pigmy with well developed dissimulation skills. Don’t expect him to jump at it.

  3. Dino Reno

    The beatings will continue until Dimon resigns. This is all about getting him to quit in light of his comment, ” I’m richer than you.” He crossed the line with that remark because he boasted about the great divide of income distribution in the country and he was bailed out by the taxpayers no less. The knives for Morgan came out after that remark about year ago. The fact that he’s still there says a lot about how insulated and protected from the state and by the state the one tenth of one percent is. Every one around him is paying the price for his moment of candor–the truth that dares not speak its name. My bet he outlasts Obama.

      1. frosty zoom

        ms. england was one of the lowerlings at abu ghraib.

        guess i was trying to say that no one upstairs will face any repercussions.

  4. F. Beard

    If you can’t successfully regulate the banks or prosecute bank criminals then what YOU CAN DO is cut off all government privileges both explicit and implicit and let the banks bleed to death into a Postal Savings Service.

    Or continue to be the pathetic equivalent of a battered wife who won’t leave her abusive husband and also supports the bum too.

  5. Walter Map

    Of course there will be an investigation.

    It will be carefully tailored to make it appear as if there’s some actual regulation going on. There will be fines which ultimately will be paid for by taxpayers with interest, leaving J.P. Morgan with a tidy profit, if not a new rent extraction stream. One or two nameless underlings might be thrown under the bus, perhaps compensated handsomely for serving their masters as patsies, but nobody anywhere near the top will be inconvenienced any more than necessary.

    The incident will then fade over the horizon, and that will be the end of it.

    There will be no justice so long as the bankster crime syndicate controls the federal government, and there is no feasible mechanism for breaking that control. And that is quite by design.

    1. F. Beard

      and there is no feasible mechanism for breaking that control. Walter Map

      Sure there is (roughly):

      1) Set up a Postal Savings Bank for all citizens. It should be free up to normal household limits on number of transactions and account size. It should make no loans and pay no interest.
      2) Bailout the entire population equally with new fiat till all bank deposits are 100% covered by reserves. Force the banks to use their new excess reserves to pay back reserves owed to the Fed.
      3) Announce in advance and then cancel all government deposit insurance.
      4) Stand back and watch with satisfaction as the banks bleed reserves into the Postal Savings Service.
      5) Announce in advance and then abolish the Fed. All unclaimed bank reserves to be destroyed or distributed equally to the population.
      6) Ban further borrowing by the monetary sovereign.

      The above would convert the surviving commercial banks into what they always should have been – investment banks for sophisticated or at least voluntary investors.

      The Overton Window should include a practical, just plan for eliminating government backing for the banks. I suggest knowledgeable bank critics start working on one.

      1. Walter Map

        Like I said, there is no feasible mechanism for breaking that control.

        Do you really think TPTB are going to buy into, much less allow, any element of your proposal? Don’t be absurd. They’re not going to let you do anything that even seems to threaten their cash cow. That’s what makes it infeasible.

        Get back to us on this when you’ve come up with some way to get it past TPTB.

        1. skippy

          Some still think this is an – enlightenment – problem… its like the bovine pleading or cajoling the feedlot Mgr for what he’s about to do.

          When the feedlot Mgr is concerned about making his production targets (keeping Job) and his owners only think about stuffing more electrons of price into some blackbox, enlarging their virtual codpieces for display amongst peers.

          skippy… May their Merciful Shadow fall upon you – Lexx

        2. F. Beard

          What? You think the PTB can stand in the way of a just and sound way to give the entire population money and at the same time destroy the hated banks?

          One more crash like the one we’ve had and there will be change – for better or worse. We should plan for the better.

            1. F. Beard

              Well, Louis XVI lost his head and so did Charles I and Tsar Nickolas (actually shot, I think).

              It seems they could not stand in the way.

              1. skippy

                Your answer is NO, so you have no clue as to how they operate – think – see themselves or like you “foreigners”.

                “Well, Louis XVI lost his head and so did Charles I and Tsar Nickolas (actually shot, I think).” – beardo

                skippy… short list of differences… NSA, global affiliation, inter marriage, massive inequality between projection of force, etc.

  6. Eric S

    There will not be any serious prosecutions. There will be some noise, maybe a few mid-level guys will get hit with something, probably another fine. The deal is done, history is written. Wall Street got into trouble, tanked, practically fell over, got saved by taxpayers, and got away with the cash. Period. All the rest, the minor details, somebody is in trouble, some company pays a fine, it’s all just fluff.

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