Recent enforcement actions included charges brought by the SEC against two JPMorgan traders associated with the "London Whale" for lying about massive derivatives losses, and against a number of microcap companies, their CEOs and stock promoters in penny stock schemes. In addition, FINRA fined and censured VSR Financial and registered principal Donald Beary over sales of nonconventional investments.
SEC Charges Two in London Whale Case
Javier Martin-Artajo and Julien Grout, former traders at JPMorgan Chase & Co., were charged by the SEC with fraudulently overvaluing investments in order to hide massive losses in a portfolio they managed.
The pair worked in JPMorgan's chief investment office (CIO), which created the portfolio known as the Synthetic Credit Portfolio (SCP) as a hedge against adverse credit events. The portfolio was primarily invested in credit derivative indices and tranches, and Martin-Artajo and Grout were required to mark the portfolio's investments at fair value in accordance with U.S. GAAP and JPMorgan's internal accounting policy.
However, improving credit conditions and a change in investment strategy caused the portfolio's losses to mount. Instead of marking the investments at true value and reporting that fact, the two conspired to conceal the losses instead, and cooked up fraudulent valuations of hundreds of positions. When these were reported to management, they caused JPMorgan's reported Q1 income before income tax expense to be overstated by $660 million.
According to the SEC, Martin-Artajo instructed Grout how to mark the portfolio's investments so that, instead of being priced based on the midmarket prices contained in dealer quotes the CIO received, the positions instead were marked at the most aggressive end of the dealers' bid-offer spread. Several times Martin-Artajo even gave Grout a desired daily loss target to work with. Grout had to keep a spreadsheet to keep track of the differences between the actual midmarket prices that should have been used to price the positions and the marks he actually used.
By the middle of March, the spreadsheet indicated a spread of $432 million between the phony prices and the real ones, and Martin-Artajo told Grout to wait till March 30, against JPMorgan's policies, hoping that better prices after London trading closed would provide U.S. market activity that would support better marks for SCP's positions.
The two kept at their deception till late April, when trading counterparties raised collateral disputes over positions amounting to more than half a billion dollars. In short order, the two lost their marking authority and the bank began to value the book at the consensus midmarket prices.
In a parallel action, the U.S. Attorney's Office for the Southern District of New York also announced criminal charges against Martin-Artajo and Grout.
SEC Charges Microcaps, CEOs and Promoters in Penny Stock Schemes
Four microcap companies, their CEOs and five promoters were charged in the SEC's ongoing crackdown on penny stock schemes in the Florida area.
