Bloomberg News

Ex-JPMorgan Employees, Tax Borders, Swipe Fees: Compliance

August 15, 2013

Two former JPMorgan Chase & Co. (JPM:US) employees were charged by U.S. prosecutors with attempting to conceal trading losses at the largest U.S. bank last year as part of a probe of its $6.2 billion loss on derivatives bets.

Javier Martin-Artajo, a former executive who oversaw the trading strategy at the bank’s chief investment office in London, and Julien Grout, a trader who worked for him, were charged with conspiracy, wire fraud and making false filings in complaints unsealed yesterday in Manhattan federal court. The two men engaged in a scheme to falsify securities filings between March 2012 and May 2012, according to the government.

Bruno Iksil, the Frenchman at the center of the case who became known as the “London whale” because his portfolio was so large, signed a non-prosecution agreement with the U.S. in June, the government said yesterday. He pledged to cooperate with prosecutors as part of the deal.

Martin-Artajo was Iksil’s supervisor while Grout assisted him in valuing his trading book. JPMorgan ousted all three last year and sought to recoup some of their pay.

JPMorgan Chief Executive Officer Jamie Dimon characterized the $6.2 billion loss as “the stupidest and most-embarrassing situation I have ever been a part of.” First disclosed in May 2012, the bad bets led to an earnings restatement, a U.S. Senate subcommittee hearing and probes by the Securities and Exchange Commission and U.K. Financial Conduct Authority.

Dimon, 57, pushed out senior executives including former Chief Investment Officer Ina Drew, who oversaw the London unit where the loss took place. The bank said it clawed back more than $100 million in pay from employees who were involved with, or oversaw, the trade.

Martin-Artajo, 49, and Grout, 35, are charged with four counts, including conspiracy to falsify books and records, commit wire fraud and falsify securities filings; falsifying books and records; wire fraud; and making false filings to the SEC.

They face as long as 20 years in prison if convicted on the most serious counts.

Joe Evangelisti, a spokesman for the bank in New York, declined to comment.

Prosecutors in the office of U.S. Attorney Preet Bharara in Manhattan said Martin-Artajo and Grout manipulated and inflated the value of the position marks in the Synthetic Credit Portfolio, or SCP, which the government said had been very profitable for the bank’s chief investment office, or CIO.

Attorneys for Martin-Artajo and Iksil declined to comment on the charges. Grout’s lawyers didn’t respond to a request for comment.

The SEC has filed a parallel civil suit in Manhattan federal court seeking disgorgement of ill-gotten gains and unspecified financial penalties. In the civil suit, U.S. regulators signaled they will hold JPMorgan accountable for violating securities laws when it disclosed inaccurate information to investors because of allegedly deceitful accounting by traders in London.

The references to the bank were contained in a lawsuit

Neither Martin-Artajo nor Grout is in the U.S.

Edward Little, a partner at Hughes Hubbard & Reed LLP in New York who represents Grout, said in an Aug. 12 interview that his client was living in France and isn’t a fugitive.

Martin-Artajo was on vacation, and had received no communication telling him he shouldn’t travel, his attorneys at Norton Rose Fulbright LLP in London said in an Aug. 13 statement.

Unless the defendants surrender to authorities, the U.S. will probably have to seek extradition.

The cases are U.S. v, Grout, 13-MAG-01976, and U.S. v. Martin-Artajo, 13-MAG-01975, U.S. District Court for the Southern District of New York (Manhattan).

For more, click here, and click here.

Compliance Policy

Company Profits Without Borders Spurs Government Scrutiny

Policymakers around the world are stepping up efforts to tighten rules because a growing slice of corporate profits isn’t taxed in any country.

Multinational companies can legally structure transactions so they don’t pay tax anywhere, creating “stateless income” that is coming under attack as countries seek to fill budget gaps. The Obama administration, Organization for Economic Cooperation and Development and tax officials from other countries want to reach a consensus on how to combat the issue, with more than a dozen proposals being weighed, Bloomberg BNA reported.

The heightened scrutiny offers a chance to take action. The largest U.S.-based companies expanded their untaxed offshore stockpiles by $183 billion last year, or 14 percent, according to data compiled by Bloomberg. In the U.S., Senator Carl Levin held hearings taking U.S. technology companies to task for structures that let them pay little or no tax on billions in profits. Representative Dave Camp is leading a tax rewrite that he says will fix the system. Camp has signaled potential support for a 15 percent tax on intangibles as one way to limit base erosion, one of three options he has suggested in a discussion draft of a new tax system.

Stateless income is one driver behind a plan to stop profit shifting unveiled in July by the OECD, which calls on countries to take action in more than a dozen areas over the next two years. Treasury Secretary Jacob Lew hailed the plan. Leaders of the wealthiest economies, the Group of Eight nations, have agreed to tackle tax evasion by multinational companies anew.

The OECD plans to look at rules requiring taxpayers to disclose aggressive tax planning arrangements. The plan calls for scrutiny of facets of the digital economy that may be vulnerable to tax manipulation and a variety of changes to transfer pricing guidelines and a focus on “harmful tax practices.”

Compliance Action

Tribal Online Lenders Ask Banks to Resist Regulatory Pressure

An association of online lenders operated by Native American tribes called on banks to resist pressure from New York State to cut them off from the nation’s primary payment system.

The Native American Financial Services Association said the state’s regulators are violating the tribes’ sovereign immunity when they ask banks to prevent them from making and collecting on short-term, high-cost loans via the Internet, according to a letter written by Barry Brandon, the group’s executive director, to more than 100 banks.

The banks include Capital One Financial Corp. (COF:US), Citigroup Inc. (C:US), Bank of America Corp. (BAC:US), JPMorgan Chase & Co., Wells Fargo & Co. (WFC:US), PNC Financial Services Group (PNC:US) and U.S. Bancorp. (USB:US)

Benjamin Lawsky, the New York superintendent of financial services, on Aug. 6 ordered a group of 35 online lenders, including at least four tribal companies, to cease offering loans in New York. He also sent a letter to 117 banks requesting their assistance to “choke off” the lenders from the automated clearing house system, the bank-supported network that handles electronic bank account debits.

The doctrine of tribal sovereign immunity limits state interference in Native American governments’ actions. Brandon said tribal lending operations are legal, and that New York is “doing an end-run” around the doctrine by pressuring banks and third-party payment processors to sever ties with the tribes.

Brandon also wrote that tribes are considering “the next legal steps” to take regarding the New York actions.

The Department of Justice and the Federal Deposit Insurance Corp. have been pressuring banks to reconsider their relationships with online lenders.

Courts

Fed Given Week by Judge to Respond on New Swipe-Fee Rules

The U.S. Federal Reserve was given a week to tell a federal judge its position on immediately rewriting regulations setting debit-card swipe fees in the wake of a court finding the current rule unlawful.

U.S. District Judge Richard Leon in Washington yesterday ordered Fed General Counsel Scott Alvarez to appear in his courtroom on Aug. 21 after a lawyer for the Fed said it hadn’t made any decisions on how to replace the current rule, or whether to appeal the judge’s ruling.

Earlier in the hearing, Leon laid out a timeline that would put a final interim rule in place by the end of the month. An interim final rule takes effect immediately before any public comments are accepted.

Yesterday’s hearing comes two weeks after retailers battling banks over debit-card transaction costs were handed a victory by Leon in Washington, who said merchants were overcharged billions of dollars under an unlawful swipe fee set by the Fed.

The decision, unless overturned on appeal, will force regulators to revisit rules that bankers said would cost them 45 percent of their swipe-fee revenue.

The case is NACS v. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia (Washington).

Comings and Goings

Yellen Beats Summers as Most Likely Fed Chair in Economists Poll

Federal Reserve Vice Chairman Janet Yellen is the most qualified and most likely candidate to run the central bank, according to the majority of private economists in a Bloomberg News survey that showed Lawrence Summers trailing by wide margins in both categories.

Sixty-five percent said Yellen probably will be President Barack Obama’s selection to replace Chairman Ben S. Bernanke, while 53 percent said she would do the best job, according to an Aug. 9-13 poll of 63 economists. Twenty-five percent said Summers, Obama’s former top economic adviser, would be the nominee, while 10 percent said he would be best. Six percent said former Fed Vice Chairman Donald Kohn is most likely choice.

The survey results contrast with odds offered by bookmaker Paddy Power Plc, which show Summers is the favorite. Economists are focusing more on leadership continuity than on the political connections underpinning Summers’s chances, according to Mark Calabria, an economist and the director of financial regulation studies at the Cato Institute in Washington.

To contact the reporter on this story: Carla Main in New York at cmain2@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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Companies Mentioned

  • JPM
    (JPMorgan Chase & Co)
    • $60.34 USD
    • 0.04
    • 0.07%
  • COF
    (Capital One Financial Corp)
    • $82.75 USD
    • 0.09
    • 0.11%
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