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Feds Let JPM London Whale Swim Free; Go After London Minnow

Posted by Larry Doyle on August 15, 2013 8:00 AM |

Can you imagine if instead of suspending Alex Rodriguez and others for the use of PEDs that Major League Baseball went after the clubhouse boy, who may have been perhaps knowingly delivering them “the stuff,” and presented that to the public as cleaning up the game?

Or, if we were to steal a scene from the fabulous flick Goodfellas, picture the Feds charging the young and impressionable Spider for his involvement — albeit as a barboy — in “the family” running rackets and presenting that to the public as one of the first cases to clean up the mob.

The authorities in either case would face a fair bit of ridicule. As well they should. 

Yet it is not a stretch to make these comparisons to the charges levied against former London-based JP Morgan junior trader Julien Grout — whom I would characterize as the London Minnow  — for his involvement in the London Whale scandal.

On the heels of the SEC winning its case against Goldman Sachs vice president Fab Tourre and with these charges levied against Mr. Grout, the Feds are setting the bar mere inches off the ground in their attempt to clean up our financial industry. All I can say is that the job of being a junior trader on Wall Street just got decidedly more risky.

How is it that the London Whale, Bruno Iksil, who directly engaged in putting on the trades that led to the misrepresentations and potential fraud is allowed to cut an immunity deal and swim free while an individual, Mr. Grout, who simply took orders now faces the potential of doing serious time? The pursuit of justice here seems dramatically misplaced. The FT touches upon this theme this morning:

The former JPMorgan Chase trader nicknamed the “London whale” escaped without criminal charges in exchange for his testimony against two former colleagues whom prosecutors allege “concealed massive losses”.

Bruno Iksil, the Frenchman who earned his nickname for his large bets in credit derivatives, signed a nonprosecution agreement with authorities to testify against Javier Martin-Artajo, his former supervisor, and Julien Grout, a lower level trader who entered the valuations for the trades on the bank’s books. Both men were charged on Wednesday in New York with conspiracy and misleading investors.

The decision to not charge Mr Iksil or force him to plead guilty to a crime is “extraordinarily unusual”, one former Southern District of New York prosecutor said.

 . . . the deal stands out in two respects, lawyers say. Usually prosecutors build cases by gaining the co-operation of low-level employees and “flip” them to make a case against their supervisors. Mr Iksil’s co-operation may help build a case against his supervisor but he is also co-operating against his underling.

More unusual, former alumni of the Southern District attorney’s office say, is the break with tradition in not forcing a guilty plea from a key player in the case.

I am all for pursuing the truth and justice here.

The Feds should connect the dots to Martin-Artajo and elsewhere up the chain of command. Let the chips then fall where they may. Subpoena Grout and get a wealth of evidence to make the case.

To charge an individual like Mr. Grout, though, who is really little more than a caddy, sends the message that the Feds are more interested in getting a scalp — regardless of whose scalp it is — than meaningfully pursuing truth and justice and cleaning up Wall Street.

Junior traders on Wall Street should navigate accordingly.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Joe

    I am tired of scratching my head over this stuff….pretty obvious as to how pathetic the oversight and justice process is on this front.

    Good grief.

  • Mayberry RFD

    Barney Fife and Preet Bharara…see any similarities with these guys?

  • Peter Scannell

    What we learned from Senator Carl Levin and Senator John McCain during the hearing of the Senate Permanent Subcommittee on Investigations was that JP Morgan deliberately changed the methodology that had been historically used to calculate the valuation of large derivate trades for this singular massive blunder. The methodology that had never been used before and greatly reduced the transparency of the actual loses being beached.

    Who at JP Morgan selected/ordered the methodology?

    Who at JP Morgan applied the methodology?

    Who at JP Morgan refused to divulge to regulators that the methodology had been changed for this singular derivatives trade debacle?

    Did someone testifying at the Senate Permanent Subcommittee on Investigations give less than truthful testimony?

    It was the most contentious point in the hearing.

    Is there a method to the madness?

  • Peter Scannell

    “Mr. Martin-Artajo directed and pressured Mr. Grout to set advantageous valuations in JPMorgan’s books, the complaints say. But sometimes another trader, Bruno Iksil, tried to persuade both Mr. Martin-Artajo and Mr. Grout to opt for valuations he thought were more realistic, prosecutors claim.

    What’s interesting about Bullet Point 46 is how Mr. Iksil, who wasn’t named in the suits, went about making his case to Mr. Grout. He said to Mr. Grout that he had just completed some actual trades in the derivatives that were contributing to the losses. It appears that these were hard prices based on real-world transactions, not indicative prices.

    Mr. Grout did not end up using these prices to help value the other derivatives holdings, the government said. It seems from the complaint that, if Mr. Grout had used these fresh prices to value their overall positions, their losses would have been bigger.”

    It’s all about the cover-up – the event that turns a miscalculation into securities fraud.

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