Prosecutors Investigate JPMorgan Over Trading Losses

As federal authorities prepare to charge criminally two former JPMorgan Chase employees suspected of misrepresenting a multibillion-dollar trading loss last year, prosecutors in Manhattan are separately exploring ways to penalize the bank over the trading blowup that has come to be known as the “London Whale.”

The investigation, according to people briefed on the matter, could yield a fine and a reprimand of the bank for allowing the suspected wrongdoing to occur. Prosecutors at the United States attorney’s office in Manhattan could also force the bank to bolster internal controls that failed to thwart the trading loss.

The action would come in addition to civil charges from the Securities and Exchange Commission, which could announce a settlement with the bank as soon as this fall.

The people briefed on the matter, who spoke on the condition of anonymity, cautioned that the investigation by the United States attorney’s office was continuing and the bank was not in talks to settle that case.

Yet the case could gain momentum after prosecutors level criminal charges against the former employees. The charges, which could be announced as soon as this week, hinge on the suspicion that the employees masked the size of the trading losses as they spun out of control.

The losses, which have now reached more than $6 billion, stem from a huge bet on the health of large corporations like American Airlines. The employees, traders in the bank’s London offices, made their wager using derivatives â€" complex financial contracts whose value is typically tied to an asset like corporate bonds.

When the bet soured last year, authorities suspect, the two employees understated the value of their trades to hide the problem from executives in New York. Internal e-mails and phone recordings highlight the behavior, the people briefed on the matter said, suggesting that the traders falsified internal records to lowball the losses. Prosecutors are expected to cite the fact that in July 2012, JPMorgan restated its first-quarter 2012 earnings downward by $459 million, conceding errors in the valuations.

The employees â€" Javier Martin-Artajo, a manager who oversaw the trading strategy, and Julien Grout, a low-level trader in London â€" could face charges of falsifying bank records. A third trader, Bruno Iksil, is cooperating with the government. Some authorities have discussed having Mr. Iksil agree to a lesser charge, two people briefed on the matter said, though others have suggested that he escape all criminal liability.

It is unclear whether authorities will arrest Mr. Martin-Artajo and Mr. Grout right away. Although they could ultimately be extradited under an agreement with British authorities, Mr. Grout is living in his native France, which typically does not extradite its citizens.

Yet Mr. Grout’s lawyer, Edward Little, explained that the former trader was not running from the case. Mr. Grout, who lost his JPMorgan job last December, left London this year after struggling to find new employment. He briefly spent time this summer in the United States, where his wife’s family lives.

Mr. Grout moved back to France long before media reports last week suggested that he would face charges, Mr. Little said. “He has absolutely no intention of fleeing.”

Mr. Little declined to discuss the facts of the case. But some legal experts say Mr. Grout and Mr. Martin-Artajo could argue that traders are granted some leeway to value their trades on derivatives contracts because actual prices may not be readily available. That flexibility presents a challenge to prosecutors who must prove that the employees intentionally cloaked losses.

Lawyers for Mr. Martin-Artajo did not respond to a request for comment. Representatives for JPMorgan, the United States attorney’s office and the F.B.I. in Manhattan did not comment.

The investigations in Manhattan are playing out at a challenging moment for JPMorgan, whose once-stellar reputation was undercut by a swirl of regulatory problems.

In the aftermath of the trading loss, for example, regulators swarmed the bank. Already, the bank’s main regulator, the Office of the Comptroller of the Currency, has ordered it to improve internal controls.

Now JPMorgan is in settlement talks with the Securities and Exchange Commission, which could fine the bank for lax controls that allowed the traders to undervalue the bets, the people briefed on the matter said. In an unusually aggressive move, the S.E.C. is seeking to extract an admission of wrongdoing from the bank, reversing a longtime practice at the agency, which has allowed defendants for decades to “neither admit nor deny wrongdoing.”

The Financial Conduct Authority, a British regulator, also plans to fine the bank in the coming months, one person said. The Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and state regulators in Massachusetts continue to investigate the losses as well.

Yet the scrutiny of JPMorgan goes far beyond the trading losses. Prosecutors in Manhattan are also examining whether JPMorgan did not alert authorities to suspicions about Bernard L. Madoff, according to several people with direct knowledge of the matter. Poring over internal bank e-mails â€" documents from more than a year before Mr. Madoff’s 2008 arrest that suggest some employees believed his returns were part of a Ponzi scheme â€" the government suspects JPMorgan violated a federal law requiring banks to report questionable activity to authorities, the people said.

In an earlier statement, a JPMorgan spokesman said the bank believed “that the personnel who dealt with the Madoff issue acted in good faith in seeking to comply with all anti-money-laundering and regulatory obligations.”

Still, its tussles with prosecutors in Manhattan are hardly the only headaches for JPMorgan. The bank is contending with investigations from eight federal agencies and two foreign nations. Some of the scrutiny involves the bank’s financial crisis-era mortgage business. JPMorgan recently disclosed that federal prosecutors in California were examining whether the bank sold shoddy mortgage securities to investors in the period before the 2008 crisis.

Jamie Dimon, the bank’s chief executive, vowed to remedy relationships with regulators. Since announcing the trading losses, the bank has overhauled its controls and ousted the employees involved in the bet.

In a letter to shareholders, Mr. Dimon apologized for letting “our regulators down” and promised to “do all the work necessary to complete the needed improvements.”