Two JP Morgan Traders charged with Overvaluing Investments

On August 14, 2013, the Securities & Exchange Commission issued a press release explaining that it had charged two JPMorgan traders with attempting to conceal investor losses by overvaluing the investments in a portfolio that they managed.  The traders were Javier MarBecause of the overvalued investments, JPMorgan’s first quarter income before income tax expense was overstated by $660 million because of the alleged misconduct.

From the SEC:

The SEC alleges that Javier Martin-Artajo and Julien Grout were required to mark the portfolio’s investments at fair value in accordance with U.S. generally accepted accounting principles and JPMorgan’s internal accounting policy.  But when the portfolio began experiencing mounting losses in early 2012, Martin-Artajo and Grout schemed to deliberately mismark hundreds of positions by maximizing their value instead of marking them at the mid-market prices that would reveal the losses.  Their mismarking scheme caused JPMorgan’s reported first quarter income before income tax expense to be overstated by $660 million…

According to the SEC’s complaint filed in the U.S. District Court for the Southern District of New York, Martin-Artajo and Grout worked in JPMorgan’s chief investment office (CIO), which created the portfolio known as Synthetic Credit Portfolio (SCP) as a hedge against adverse credit events.  The portfolio was primarily invested in credit derivative indices and tranches.  The market value of SCP’s positions began to steadily decline in early 2012 due to improving credit conditions and a recent change in investment strategy.  Martin-Artajo and Grout began concealing the losses in March 2012 by providing management with fraudulent valuations of SCP’s investments.

The SEC alleges that Martin-Artajo directed Grout to revise the manner in which he marked SCP’s investments.  Instead of continuing to price the portfolio’s positions based on the mid-market prices contained in dealer quotes the CIO received, SCP’s positions were instead marked at the most aggressive end of the dealers’ bid-offer spread.  On several occasions, Martin-Artajo provided a desired daily loss target to conceal the extent of the losses.  Grout entered the marks every day into JPMorgan’s books and records, and sent daily profit and loss reports to CIO management in which he understated SCP’s losses.  For a period, Grout maintained a spreadsheet to track the difference between his marks and the mid-market prices previously used to value SCP’s positions.  By mid-March, this spreadsheet showed that the difference had grown to $432 million.

The SEC alleges that contrary to JPMorgan’s accounting policy, Martin-Artajo instructed Grout on March 30 to wait for better prices after the close of trading in London in the hope that activity in the U.S. markets could support better marks for SCP’s positions.  The concealment of losses continued beyond the first quarter.  By late April, trading counterparties raised collateral disputes over SCP positions totaling more than a half-billion dollars.  Shortly thereafter, JPMorgan’s management stripped the SCP traders of their marking authority and began valuing the book at the consensus mid-market prices.

JP Morgan and the traders that work with them had a duty to tell the truth about the value of their portfolio, and instead allegedly lied to conceal financial losses.  The U.S. Attorney’s Office for the Southern District of New York has announced criminal charges against the traders in a related action.

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