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JPM's Whale troubles may not end with civil settlement

Wednesday, 18 Sep 2013 | 7:19 AM ET
JPMorgan & Chase Co. signage outside of the company's headquarters in New York.
Peter Foley | Bloomberg | Getty Images
JPMorgan & Chase Co. signage outside of the company's headquarters in New York.

U.S. prosecutors are still investigating JPMorgan Chase's "London Whale" trading scandal for potential criminal wrongdoing, according to people familiar with the probe, in a sign that an expected $700 million regulatory settlement may not put the issue to rest for the largest U.S. bank.

Federal prosecutors in New York and FBI agents are piecing together the events that led JPMorgan to restate its 2012 first-quarter earnings and eventually reveal more than $6 billion of losses from enormous bets a group of London-based traders made on illiquid credit derivatives, according to several sources.

News of the continuing criminal investigation was first reported by Reuters on Tuesday. Meanwhile, a source told Reuters the U.S. Securities and Exchange Commission approved its portion of the civil settlement in a split vote.

The investigators are focusing on whether people inside the bank had more detailed knowledge about the potential losses than the bank had expressed in its early public statements about the matter, the sources said.

(Read more: JPMorgan expects to settle Whale probes)

JPMorgan 'London Whale' losses approach $7 billion
JPM CEO Dimon sent off a company wide memo to reaffirm its efforts to fix regulatory problems, reports CNBC's Kate Kelly.

Two former bank employees—Javier Martin-Artajo and Julien Grout—have already been charged with trying to hide some of those losses by deliberately giving inaccurate values to the sophisticated securities involved in the trades. Authorities are trying to determine whether Martin-Artajo and Grout and others working with them had felt pressured to minimize the losses, the sources said.

Bruno Iksil, the trader whose large bets earned him the nickname "London Whale," has signed a cooperation agreement with prosecutors and has not been charged with any wrongdoing.

JPMorgan has said its previous statements have been truthful regarding the events related to the London Whale trades.

"Our senior executives said what they believed to be true at the time," Mark Kornblau, a bank spokesman, said on Tuesday.

The news of the continuing criminal investigation into the bank's actions underscores the extent of legal and regulatory troubles facing JPMorgan and its chief executive, Jamie Dimon.

(Read more: US indicts twoex-traders in JPMorgan 'London Whale' case)

JPMorgan is facing probes by various government agencies into areas that include possible bribery in hiring practices in China, and potentially fraudulent sales of mortgage securities.

Following the "Whale" scandal, Dimon faced a bruising battle with some shareholders to retain his chairman title and has since been under pressure to improve the bank's relationship with regulators.

In a memo to employees on Tuesday, Dimon said the bank is braced for more legal and regulatory scrutiny in the coming weeks and months. He outlined a series of steps JPMorgan has taken to improve operations, including devoting "unprecedented" resources to fix its risk, legal and compliance operations. Dimon said he has also begun meeting personally with regulators to improve relationships.

JPMorgan has added 4,000 staff to its control group since 2012—three quarters of them this year—and increased spending on those efforts by about $1 billion. The bank's control group includes risk, compliance, legal, finance, technology, oversight and control and audit functions.

"Never before have we focused so much time, effort, brainpower, technological power and money on a single, enterprise-wide objective," Dimon said in the memo, which was reviewed by Reuters.

Settlement talks

News of the criminal investigation comes after a source said on Monday that the bank was nearing a deal with regulators, including the SEC, the Office of the Comptroller of the Currency and the Federal Reserve, to settle their probes into the "Whale" scandal for at least $700 million.

In a split vote late last week, the SEC approved its portion of the settlement with J.P. Morgan, according to people familiar with the matter. Mary Jo White, the SEC chairman, and Daniel Gallagher, an SEC commissioner, both recused themselves. Most votes by the commission are unanimous.

White withdrew because JPMorgan was among her clients when she worked as a defense attorney at Debevoise & Plimpton. Gallagher's former firm, WilmerHale, also did work for JPMorgan.

(Read more: My client's a government pawn: Lawyer for 'Whale' trader)

It is too early to say whether any additional charges will be brought or whether the bank itself will face any criminal liability. But federal prosecutors did not participate in settlement talks between the bank and its regulators, sources said.

"The Justice Department is saying, 'We don't want to buy a pig in a poke. We want to know what the scope of the issues are before we say you're done, we have no more business with you on this issue,'" said Samuel Buell, a professor at Duke University Law School.

'Whale' probe

The U.S. attorney in Manhattan, Preet Bharara, at an August press conference announcing the criminal complaint against Martin-Artajo and Grout, said his office was continuing to investigate the trading losses. On Monday, a federal grand jury in Manhattan indicted the two former JPMorgan traders.

Martin-Artajo, who supervised Iksil, is charged with conspiracy to commit fraud, falsify books and records, and make false statements to the SEC. Grout is facing similar charges.

U.S. prosecutors say the two deliberately reported inflated values for Iksil's derivatives positions to try to hide the losses they were suffering from higher-ups in the bank.

Both men are living in Europe and federal authorities aim to extradite them to New York for trial. Martin-Artajo's lawyer recently said he would fight extradition from Spain. Grout's lawyer said in a statement emailed to the press on Tuesday, "We look forward to his vindication."

The ongoing criminal probe leaves JPMorgan in a position similar to the one in which the embattled hedge fund SAC Capital Advisors found itself last spring when it agreed to pay more than $600 million to settle an insider trading case brought by the SEC, only to find itself facing similar criminal charges months later.

Just as with the London Whale regulatory investigation, federal prosecutors did not take part in the settlement talks Steve A. Cohen's SAC Capital had with the SEC.

By Reuters

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