“Attorney General, Manhattan U.S. Attorney, and FBI Assistant Director in Charge Announce Charges Against Two Derivatives Traders in Connection with Multi-Billion-Dollar Trading Loss at JPMorgan Chase & Company”

August 15, 2013

The New York Times on August 14, 2013 released the following:

Defendants Hid More Than Half-a-Billion Dollars in Losses Resulting from Derivatives Trading in JPMorgan’s Chief Investment Office; a Third Trader, Bruno Iksil, Entered a Non-Prosecution Cooperation Agreement

Eric Holder, the Attorney General; Preet Bharara, the United States Attorney for the Southern District of New York; and George Venizelos, the Assistant Director in Charge of the New York Office of the Federal Bureau of Investigation (FBI), announced the unsealing of criminal complaints against Javier Martin-Artajo and Julien Grout for their alleged participation in a conspiracy to hide the true extent of losses in a credit derivatives trading portfolio maintained by the Chief Investment Office (CIO) of JPMorgan Chase & Company (JPMorgan). Martin-Artajo served as a managing director and head of Credit and Equity Trading for the CIO, and Grout was a vice president and derivatives trader in the CIO.

Attorney General Eric Holder said, “Our financial system has been hurt in recent years not just by risky bets gone bad but also, in some cases, by criminal wrongdoing. We will not stop pursuing those who violate the public trust and compromise the integrity of our markets. I applaud U.S. Attorney Bharara, his colleagues in the Southern District of New York, and all of our partners on the President’s Financial Fraud Enforcement Task Force for their longstanding commitment to combating all forms of financial fraud. And I pledge that we will continue to move both fairly and aggressively to bring the perpetrators of financial crimes to justice.”

Manhattan U.S. Attorney Preet Bharara said, “As alleged, the defendants, Javier Martin- Artajo and Julien Grout, deliberately and repeatedly lied about the fair value of billions of dollars in assets on JPMorgan’s books in order to cover up massive losses that mounted month after month at the beginning of 2012, which ultimately led JPMorgan to restate its losses by $660 million. The defendants’ alleged lies misled investors, regulators, and the public, and they constituted federal crimes. As has already been conceded, this was not a tempest in a teapot but rather a perfect storm of individual misconduct and inadequate internal controls. The difficulty inherent in precisely valuing certain kinds of financial positions does not give people a license to lie or mislead to cover up losses; it does not confer a license to create false books and records or to make false public filings. And that goes double for handsomely paid executives at a public company whose actions can roil markets and upend the economy.”

FBI Assistant Director in Charge George Venizelos said, “The complaints tell a story of a group of traders who got in over their heads, and to get out, doubled down on a series of risky positions. In the first quarter of 2012, boom turned to bust, as the defendants, concerned about losing control to other traders at the bank, fudged the numbers on their daily book and in some cases completely made them up. It brought a whole new meaning to ‘cooking the books.’”

In a separate action, the U.S. Securities and Exchange Commission (SEC) announced civil charges against Martin-Artajo and Grout.

According to the allegations in the criminal complaints unsealed today in Manhattan federal court:

JPMorgan’s CIO is a component of the bank’s Corporate/Private Equity line of business, which, according to the bank, exists to manage the bank’s excess deposits—approximately $350 billion in 2012. Since approximately 2007, the CIO’s investments have included a so-called Synthetic Credit Portfolio (SCP), which consists of indices and tranches of indices of credit default swaps (CDS). A credit default swap is essentially an insurance contract on an underlying credit risk, such as corporate bonds. CDS indices are collections of CDSes that are traded as one unit, while CDS tranches are portions of those indices, usually sliced up by riskiness.

Under U.S. Generally Accepted Accounting Principles (GAAP) and according to JPMorgan policy, CDS traders were required to value the securities in their portfolios on a daily basis. Those values, or “marks,” became part of the bank’s daily books and records. Because CDS indices and tranches are not traded over an exchange, traders are required to look to various data points in order to value their securities, such as actual transaction prices, price quotations from market makers, and values provided by independent services (such as Totem and MarkIT). JPMorgan’s accounting policy, which used the same methodology employed by the independent services, provided that the “starting point for the valuation of a derivatives portfolio is mid-market,” meaning the mid-point between the price at which market-makers were willing to buy or sell a security. Through about January 2012, CIO traders generally marked the securities in the SCP approximately to this mid-point, which they sometimes referred to as the “crude mid.”

The SCP was extremely profitable for JPMorgan—it produced approximately $2 billion in gross revenues since its inception—but in the first quarter of 2012, the SCP began to sustain consistent and considerable losses. From at least March 2012, Martin-Artajo and Grout conspired to artificially manipulate the SCP marks to disguise those losses. They did so, among other reasons, to avoid losing control of the SCP to other traders at JPMorgan.

Although Martin-Artajo pressured his traders, including Grout, to “defend the positions” in early 2012 by executing trades at favorable prices, the SCP lost approximately $130 million in January and approximately $88 million in February. In March 2012, when the market moved even more aggressively against the CIO’s positions, Martin-Artajo specifically instructed Grout and the head SCP trader, Bruno Iksil (who has entered a non-prosecution agreement), not to report losses in the SCP unless they were tied to some identifiable market event, such as a bankruptcy filing by a company whose bonds were in the CDS index. Martin-Artajo explained that “New York”—meaning, among others, JPMorgan’s Chief Investment Officer—did not want to see losses attributable to market volatility.

By mid-March 2012, Grout was explicitly and admittedly “not marking at mids.” He maintained a spreadsheet that kept track of the difference between the price that Grout recorded in JPMorgan’s books and records on the one hand, and the “crude mids” on the other. By March 15, 2012, according to Grout’s spreadsheet, the difference had grown to approximately $292 million. In a recorded online chat the same day, Grout explained that he was trying to keep the marks for most of the SCP’s positions “relatively realistic,” with the marks for one particular security “put aside.” That is, Grout mispriced that one particular security, of which the SCP held billions of dollars’ worth, by the full $292 million. The following day, Iksil told Martin-Artajo that the difference had grown to $300 million, and “I reckon we get to 400 [million] difference very soon.” In a separate conversation, Iksil remarked to Grout that “I don’t know where he [Martin-Artajo] wants to stop, but it’s getting idiotic.”

In the days that followed, Grout at times ignored Iksil’s instructions on how to mark the positions and instead followed Martin-Artajo’s mandate to continue to hide the losses. By March 20, 2012, Iksil insisted that Grout show a significant loss: $40 million for the day. In a recorded call, Martin-Artajo excoriated Iksil, finally emphasizing, “I didn’t want to show the P&L [the profit and loss].” Throughout the remainder of March 2012, while Iksil continued to try to insist that Martin-Artajo acknowledge the reality of the losses, Grout, at Martin-Artajo’s instructions, continued to hide them. As of March 30, 2012—the last day of the first quarter of 2012—Grout continued to fraudulently understate the SCP’s losses. These incorrect figures in the SCP were not only integrated into JPMorgan’s books and records, but also—as Martin-Artajo and Grout were well aware—into the bank’s quarterly financial filing for the first quarter of 2012 with the SEC.

During the course of the mis-marking scheme carried out by Martin-Artajo and Grout, the CIO’s Valuation Control Group (VCG) was supposed to serve as an independent check on the valuations assigned by traders to the securities that the traders were marking at month-end. The VCG, however, was effectively only staffed by one person and did not perform any independent review of the valuations. Instead, the VCG tolerated valuations outside the bid-offer spread as presented by Martin-Artajo and other CIO traders.

In August 2012, after Martin-Artajo and Grout were stripped of their responsibilities over the SCP and their scheme was discovered, JPMorgan restated its first quarter 2012 earnings and recognized an additional loss of $660 million in net revenue attributable to the mismarking of the SCP. JPMorgan announced that it was restating its earnings because it had lost confidence in the “integrity” of the marks submitted by Grout, at Martin-Artajo’s direction.

* * *

Martin-Artajo, 49, a Spanish citizen, and Grout, 35, a French citizen, are charged in one count of conspiracy; one count of falsifying the books and records of JPMorgan; one count of wire fraud; and one count of causing false statements to be made in JPMorgan’s filings with the SEC. They each face a maximum sentence of five years in prison on the conspiracy count and 20 years in prison on each of the three remaining counts in the complaints and a fine of the greater of $5,000,000 or twice the gross gain or gross loss as to certain of the offenses.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. The task force was established to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory, and regulatory agencies ever assembled to combat fraud.

Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state, and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations.

Mr. Bharara praised the work of the FBI. He also thanked the SEC and the Department of Justice’s Office of International Affairs.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Eugene Ingoglia and Matthew L. Schwartz are in charge of the prosecutions.

The charges contained in the complaints are merely accusations, and the defendants are presumed innocent unless and until proven guilty.”

————————————————————–

Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

Federal Crimes – Detention Hearing

Federal Mail Fraud Crimes

————————————————————–

To find additional federal criminal news, please read Federal Criminal Defense Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition Defense, OFAC SDN Sanctions Removal, International Criminal Court Defense, and US Seizure of Non-Resident, Foreign-Owned Assets. Because we have experience dealing with INTERPOL, our firm understands the inter-relationship that INTERPOL’s “Red Notice” brings to this equation.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


“Madoff Has Met His Match: Mortgage Fraud Crime of the Century”

October 26, 2012

Forbes on October 26, 2012 released the following:

John Wasik, Contributor

“With less than 88 years left in this century, it’s awful tough to say what the crime of this century will be.

Will it be the $60 billion Madoff Ponzi scam? The Dot-Com bubble? My candidate is a slam dunk so far: Mortgage fraud.

Mortgage fraud took place on so many levels for so many years that it eclipses Madoff by a factor of 100. That’s my humble estimate because nobody really knows how pervasive it was. Prosecutors are still issuing indictments more than six years after the real estate market peaked.

The recent $1 billion suit against Bank of America/Countrywide alleging that the bank sold defective loans to Fannie Mae and Freddie Mac is but a small piece of this unraveling series of financial flim-flams, which rival most scams because of its pervasive nature and involvement of thousands of financial institutions and intermediaries. The bank says the government’s claims are “simply false.”

Why is mortgage fraud such a Tyrannosaurus Rex in the world of scamdom? Because it combined easy money, greed and securitizing that avarice all over the world. It was based on the myth that home prices don’t decline and quick profits could be had by nearly anyone. You, too, could become an investment banker! More importantly, it may prove to be the mother of all swindles because it nearly took down the world’s largest financial system. And we’re not out of the woods yet.

We have some idea of how many mortgage crimes were out there thanks to the suspicious activity reports supplied to the FBI by banks, starting in the first quarter of 2006. These weren’t necessarily fraud cases that resulted in prosecution. In fact, very few ended up as court cases in which people went to jail, which has been a widespread problem in mortgage fraud.

Starting in 2006, the FBI got wind of some 7,500 suspicious mortgage activities. By 2008, that figure doubled and peaked in the second quarter of last year at nearly 30,000, according to the Financial Crimes Enforcement Network or FinCen. The number of fraud filings dropped 41 percent from the second quarter of last year through this year’s second quarter.

What do these numbers mean? That bankers suspected foul play in the origination or refinancing of mortgages. And these reports were the proverbial tip of the iceberg, because they only looked at the problem from one step in the process. Here’s what else was going on, although we don’t have any hard numbers:

  • Mortgage Foreclosure “Rescues.” Companies would set up shop to promise defaulting homeowners that they could halt the foreclosure process. They’d fleece the hapless homeowner for a steep fee, then move on.
  • Appraisal Scams. Individuals would hire crooked appraisers to under-appraise a home, obtain a mortgage, then sell it at a much-higher price.
  • Securitization Swindles. This may be the biggest scam of all. Junk mortgages were bundled, given the highest credit ratings, then sold to investors in vehicles like collateralized mortgage obligations. These “sub-prime loans” are still on the books of some of our largest banks, Fannie Mae and Freddie Mac.
  • Robo-Signing. Banks eager to sell loans to Wall Street hurried the process along by creating automated, illegitimate pipelines. State attorneys general settled with the banks on this issue, although no one seems to have been prosecuted for these crimes and it’s done little to stem the foreclosure wave.
  • Predatory Lending. Low-income areas were targeted by rapacious brokers and bankers to sell mortgages and home-equity loans with high rates and fees to people who couldn’t afford them.

How much did all of this cost Americans? Again, there’s no reliable estimate, but when this massive house of cards came tumbling down at the end of 2008, trillions were lost. Wall Street and AIG insurance got a $700-billion-plus bailout and American homeowners are still down some $7 trillion in terms of lost equity, according to Robert Reich, an economist and former labor secretary.

While a handful of hedge fund gurus and contrarian investors won big on betting against this mammoth mortgage swindle, “Wall Street’s excesses almost ruined the economy,” Reich said. If the Federal Reserve, U.S. Treasury, Congress, George W. Bush and President Obama hadn’t teamed up to bail out the banks, this year would’ve been worse than 1932, instead of a sluggish 2012.

And the beat goes on as prosecutors dig through layers of the mortgage fraud. Here’s just a typical sampling of some recent activity from the FBI and federal prosecutors:

“A federal indictment charged 17 defendants in Charlotte, North Carolina, and elsewhere with racketeering, investment fraud, mortgage fraud, bank bribery, and money laundering. The government alleges a criminal enterprise engaged in an extensive pattern of racketeering activities, consisting of investment fraud, mortgage fraud, bank fraud, money laundering, and distribution of illegal drugs. Members of the enterprise also bribed bank officials and committed perjury before the grand jury. The co-conspirators stole more than $27 million from more than 50 investor victims. Rather than investing victims’ money as promised, the enterprise diverted victims’ money to finance its mortgage fraud operations and to support its members’ lifestyles.”

I wouldn’t be exaggerating if I predicted that there are hundreds more mortgage frauds yet to be discovered and prosecuted. The states are finding them all the time, some four years after the collapse of Lehman Brothers.

The larger problem is that the perpetrators are still at large and the system that allowed huge derivative gambles on mortgages is still in place. The mega-banks behind this devilish casino got larger, and still need to be broken up. Fannie Mae and Freddie Mac, the two quasi-public mortgage insurers that bought warehouses of bad mortgages, are still wards of the state. And foreclosures continue to ravage communities from California to Florida.

After what will certainly be one of the closest and contentious elections in decades, Congress needs to get to work to bust up hobbled giants like Bank and America and Citigroup. Then it needs to institute the Volcker rule to isolate speculation from federally insured banking activities or bring back Glass-Steagall, which completely separated trading from regulated lending as part of New Deal reforms.

A tax on speculative trading would also reduce systemic risk. I don’t care if banks gamble on their trading desks, but they shouldn’t do it expecting a big bailout on the taxpayers’ backs.

What can you do? You can report suspicious activity to your state attorney general or the Department of Justice, through its financial crimes site stopfraud.gov. You may not help the government land a big crook — they all seem to be enjoying their fat compensation packages in the Hamptons — but you could give prosecutors a leg up on shutting down an ongoing scam.”

————————————————————–

Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

Federal Crimes – Detention Hearing

Federal Mail Fraud Crimes

————————————————————–

To find additional federal criminal news, please read Federal Criminal Defense Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition Defense, OFAC SDN Sanctions Removal, International Criminal Court Defense, and US Seizure of Non-Resident, Foreign-Owned Assets. Because we have experience dealing with INTERPOL, our firm understands the inter-relationship that INTERPOL’s “Red Notice” brings to this equation.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


Michael Wilkerson, Joyce Wilkerson, Lee Garell, and Denise Haines Indicted by a Philadelphia Federal Grand Jury in an Alleged Mortgage Fraud Scheme

September 30, 2011

The Federal Bureau of Investigation (FBI) on September 29, 2011 released the following:

“Pennsylvania Pastor Charged in Mortgage Fraud Scheme

PHILADELPHIA— Michael Wilkerson, Joyce Wilkerson, Lee Garell, and Denise Haines were charged today with engaging in a scheme to defraud JP Morgan Chase’s predecessor, Chase Manhattan Bank, by fraudulently obtaining home loans valued at more than $6 million for properties located in Schwenksville and Glenmoore, Montgomery County, Penn., announced U.S. Attorney for the Eastern District of Pennsylvania Zane David Memeger.

According to the indictment, Michael Wilkerson, pastor of New Life Millennium Life Restoration Fellowship in Montgomery County, recruited several of his congregants and the congregants’ families and friends to participate in a number of real estate transactions. If they had good credit and acted as “straw purchasers”—meaning they would sign loan documents as the purchaser of a house and attend the property settlement—Michael Wilkerson would pay them $15,000. Wilkerson would allegedly pay another $5,000 if they referred other straw purchasers to him. Wilkerson recruited at least five individuals who agreed to be straw purchasers of homes. The indictment alleges that Joyce Wilkerson participated in the fraud scheme by assisting Michael Wilkerson, explaining the transactions to the “straws,” paying the “straws” and also pretending to be a co-purchaser of each of the homes at the time of settlement. The indictment alleges that Garell, a real estate broker with Long & Foster Companies, prepared the sales paperwork for each of the homes that was sold to the “straws” and, along with Michael Wilkerson, dictated the fraudulent terms set out in the settlement sheets.

The indictment alleges that Haines, a mortgage broker with American Group Mortgage Corporation, submitted fraudulent loan applications in the transactions to Chase Manhattan Bank. These fraudulent loan applications falsely represented the appraised value of the homes, the identification of the “straws,” the source of funds, the borrower’s income and assets, and their intent to take possession of the homes as their primary residence. Based on the representations made in the loan documents, Haines knew she could get Chase Manhattan Bank to approve the loans with little verification of the information on the loan applications.

When the loans were funded at the time of settlement, Michael Wilkerson, Joyce Wilkerson, Garell and Haines allegedly manipulated the documents prepared at settlement and, later, forwarded the settlement documents to Chase Manhattan Bank to make it appear to the bank that the “straws” brought considerable cash to the closings, when, in fact, all of the money involved at the settlement actually came from Chase Manhattan Bank. The defendants allegedly shared in the profits from the fraudulent sales.

According to the indictment, after settlement on the homes, Michael Wilkerson took possession of all of the homes, rented four of them and lived in another. He paid the mortgages with rental income for approximately six months then told the “straw” purchasers that they had to pay the mortgages. This last act led to the loans falling into default and then foreclosure, resulting in a loss of approximately $3 million.

If convicted, each defendant faces a maximum possible sentence of 180 years in prison, five years’ supervised release, a fine of up to $6 million, and a $600 special assessment.

The case was investigated by the FBI and is being prosecuted by Assistant U.S. Attorney Anita Eve.

An indictment or information is an accusation. A defendant is presumed innocent unless and until proven guilty.

President Obama established the Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.”

To find additional federal criminal news, please read Federal Crimes Watch Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition and OFAC SDN Sanctions Removal.

The author of this blog is Douglas McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.

Bookmark and Share