The SEC has charged two former traders at JPMorgan Chase & Co with fraudulently overvaluing investments in order to hide massive losses in a portfolio they managed.
Javier Martin-Artajo and Julien Grout were accused of marking up the market value of an investment portfolio to hide the fact that it was plummeting in value.
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The pair was charged in federal criminal complaints with conspiracy to falsify books and records, commit wire fraud and falsify SEC filings.
The SEC has also filed parallel civil fraud charges against both traders.
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, following Martin-Artajo’s direction, Grout began using prices for the portfolio deliberately chosen to minimise losses rather than represent fair value.
The SEC has alleged that contrary to JPMorgan’s accounting policy, Artajo instructed Grout to wait for better prices after the close of trading in London in so that US markets could support better marks for SCP’s positions.
The SEC said Grout entered these marks into JPMorgan’s systems daily, and sent reports to JPMorgan management that understated the SCP’s mark-to-market losses.
Their mismarking scheme caused JPMorgan’s reported first quarter income before income tax expense to be overstated by US$660 million.
George S. Canellos, Co-Director of the SEC’s Division of Enforcement, said: "The trading instruments were complex but these traders had a simple rule to follow: tell the truth about their fair value. Yet these traders brazenly accumulated a massive position in derivatives with lax oversight, and then lied to cover up their massive losses when the market turned against them."
