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Feds charge two in "London Whale" case

NEW YORK Two former JPMorgan Chase & Co. (JPM) traders were accused of trying to conceal the size of the investment bank's $6 billion trading loss last year in criminal conspiracy charges unsealed Wednesday that raised fresh questions about whether Wall Street learned its lessons from the 2008 financial crisis.

Javier Martin-Artajo, 49, and Julien Grout, 35, and their co-conspirators were accused of "artificially increasing the market value of securities to hide the true extent of hundreds of millions of dollars of losses," according to court papers.

The case is related to a surprise loss last year by trader Bruno Iksil, who became known as the "London whale" for the enormous bets he made. Martin-Artajo, who supervised JPMorgan's trading strategy in London, and his subordinate Grout, who recorded the value of the bad investments, are accused of conspiring to hide more than a half-billion dollars of losses in a trading portfolio that ultimately lost more than $6 billion.

Martin-Artajo and Grout were charged in federal criminal complaints with conspiracy to falsify books and records, commit wire fraud and falsify Securities and Exchange Commission filings.

They also were charged separately in an SEC civil complaint. The SEC said the men fraudulently mismarked investments in a multibillion-dollar portfolio known as the Synthetic Credit Portfolio, a hedge against adverse credit events that began to decline in value as credit markets improved in early 2012.

From March to May 2012, under Martin-Artajo's direction, Grout began using prices for the portfolio "deliberately chosen to minimize losses rather than represent fair value. Grout entered these marks into JPMorgan's systems daily, and sent reports to JPMorgan management that understated the SCP's mark-to-market losses," the SEC said.

The two were in the midst of their alleged mismarking scheme in April 2012 when media reports publicized the large size of the portfolio they controlled, the SEC noted. The first trading day after the reports surfaced, the portfolio fell in value by hundreds of millions of dollars, it said. Still, Martin-Artajo directed Grout to disclose to management only $5.7 million in daily losses, a figure Grout put out but replaced later in the day with a loss of $395 million, the SEC said.

In July of that year, JPMorgan announced it would restate its first quarter results for net revenue by $660 million.

The SEC seeks injunctions against the two as well as unspecified fines and restitution of allegedly illicit profits they gained.

Martin-Artajo is a citizen of Spain while Grout is a citizen of France. Martin-Artajo mainly worked in London, though he sometimes worked at JPMorgan offices in the United States, including New York.

The London whale charges have engulfed JPMorgan since they were revealed last year, tarnishing the bank's reputation as a stellar risk manager and the favorite of Washington lawmakers. The Justice Department's charges are also hardly the end for the financial giant. The SEC, Congress, the Federal Reserve, federal banking regulators and the U.K. Financial Conduct Authority, among others, are also looking into the trading loss.

JPMorgan, the biggest U.S. bank by assets, has weathered the storm; last year, even with the trading loss, the bank pulled in its biggest annual profit ever, and its stock is up by a third from its price before the London Whale losses. The bank has also gotten rid of top executives and taken back bonuses of some who were responsible. It acknowledged mistakes but has been adamant that it did not try to mislead investors.

Authorities have since questioned whether the bank tried to cover up the loss or downplay it to investors and regulators, and those questions remain front and center in today's charges.

For example, the complaint against the two bankers repeatedly refers to unnamed higher-ranking bank officials in New York did prosecutors say did not want Martin-Artajo's unit's trades to show a loss.

"Martin-Artajo claimed that this was what 'New York' -- that is, the bank's senior management in New York -- wanted, explaining that those JPM officials did not want to see day-to-day market volatility," the complaint read.

In a press conference Wednesday afternoon to discuss the charges, U.S. Attorney Preet Bharara emphasized that Iksil, the trader who allegedly made the bad bets and who will not be prosecuted because he is cooperating with authorities, discussed pressure from above.

The trading loss in 2012 struck many critics as further evidence another example of why the largest banks -- widely held, publicly traded companies that take deposits from ordinary citizens -- are still feared as giants that take enormous risks that expose shareholders and taxpayers to large losses. Senate hearings in March probed just how high up the chain of command responsibility for JPMorgan's losses went.

Lawyers at Norton Rose Fulbright LLP in London who are representing Martin-Artajo said their client is "on a long planned vacation and will be returning to the UK as scheduled."

"Mr. Martin-Artajo has co-operated with every internal and external inquiry which was required of him in the UK, the firm said in a statement. "He received no communication from any governmental regulators, including the Financial Conduct Authority in the UK with whom he has fully co-operated, which would indicate that he should not be on vacation at this time. Mr. Martin-Artajo is confident that when a complete and fair reconstruction of these complex events is completed, he will be cleared of any wrongdoing."

A JPMorgan spokesman declined to comment.

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