The SEC charged two former JPMorgan Chase traders on Wednesday with fraudulently overvaluing investments in order to mask massive losses in a portfolio they oversaw.
Javier Martin-Artajo and Julien Grout worked in JPMorgan’s Chief Investment Office, which created the Synthetic Credit Portfolio to hedge against adverse credit events.
Martin-Artajo and Grout were, under U.S. generally accepted accounting principles, required to mark the portfolio’s investments—primarily in credit derivatives indices and tranches— at fair value.
The SEC alleges, however, that when the portfolio started taking losses in early 2012 as a result of improved credit conditions, Martin-Artajo instructed Grout to maximize the value of hundreds of positions in order to hide their losses.
The alleged scheme reportedly caused the bank’s first quarter income before income tax expense to be overstated by $660 million.
U.S. officials also plan to pursue criminal charges against Martin-Artajo and Grout.
“The trading instruments were complex but these traders had a simple rule to follow: tell the truth about their fair value,” George S. Canellos, the co-director of the SEC’s Division of Enforcement, said. “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.”