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.”

With I.P.O.’s on the Rise, Analysts Get New Scrutiny

The market for initial public offerings has made a comeback, surging to levels not seen since before the financial crisis. At the same time, concerns have resurfaced over the role of Wall Street research analysts in these lucrative deals.

For years, stock analysts have been barred from pitching I.P.O. business, a big moneymaker for firms like Goldman Sachs, JPMorgan Chase and Citigroup. Banking fees from helping companies list their shares on stock exchanges have topped $1.7 billion in the United States so far this year.

The country’s largest banks agreed to bar their analysts from I.P.O. solicitations a decade ago after regulators, led by Eliot Spitzer, then the New York attorney general, uncovered evidence that during the Internet boom some analysts issued overly optimistic reports about dot-com start-ups to help their colleagues on the investment banking side win underwriting assignments.

But some analysts say Wall Street is slipping back into its old ways.

Today, companies routinely interview analysts when selecting bankers to underwrite their I.P.O.’s. During these meetings, the analysts say, they increasingly feel pressure to say the right things to curry favor with a company’s management and owners. They also see themselves as participating in their banks’ efforts to win business, a potential breach of government regulations.

The enforcement department of the Financial Industry Regulatory Authority, or Finra, Wall Street’s self-regulatory body, has sent an inquiry asking several firms for information on the issue, said people briefed on the matter who spoke on the condition of anonymity.

“The walls between research and banking can still be porous,” said Jay R. Ritter, a professor at the University of Florida who studies the I.P.O. market. “It doesn’t surprise me that there has perhaps been some backsliding.”

Representatives for Goldman and JPMorgan declined to comment. A spokeswoman for Citigroup said that its research department acts independently of its banking unit.

The banks say that their analysts are supposed to discuss only broad industry trends at these meetings and not pitch the bank’s underwriting services. If asked about specific views on a company, like earnings models or potential I.P.O. pricing, they are supposed to refer those questions to bankers.

Interviewing analysts as part of the process of going public has become more prevalent, several analysts said, with the proliferation of so-called I.P.O. advisers, firms that advise companies in the early stages of an offering. These firms are paid to help companies and, often, their private equity owners screen banks vying to take companies public. Among other things, they arrange for meetings between companies and the Wall Street analysts and bankers.

“If you are going to see the people who are screening the underwriters you are there for one purpose, to win banking business,” said another Wall Street analyst, who also requested anonymity because his company prohibits employees from speaking to the media without prior approval. This analyst said he knew of the practice but had not taken part in any meetings.

Participants say company meetings with the analysts and bankers are held separately, but can happen within hours of each other, and banks rarely send compliance officers to monitor the discussions. Analysts say that when private equity executives are involved, the sessions can turn especially uncomfortable, veering into questions about a company’s valuation.

Solebury Capital, Rothschild and Lazard are among the leading firms in this area. Solebury has recently guided a number of companies through the I.P.O. process, including the discount retailer Five Below; Bloomin’ Brands, which owns Outback Steakhouse and Bonefish Grill; and HD Supply Holdings, according to regulatory filings.

In an interview, Solebury’s co-chief executives, Alan Sheriff and Ted Hatfield, said that their corporate clients meet with analysts as well as bankers as they work through the offering process, but that the meetings with analysts are “informational,” regarding general market trends.

“Pitching investment banking in analyst meetings is strictly off limits,” Mr. Sheriff said.

A senior research executive at one major Wall Street firm says he thinks it is acceptable for an analyst to have a broad chat with a company looking to go public, and the analyst can benefit from that meeting by learning more about the industry. But he expressed concern about meetings with companies in the process of choosing banks to underwrite their I.P.O.’s.

“I am not O.K. with a third party organizing a beauty contest with the express purpose of winning banking business,” said the executive, whose firm has a policy against speaking to the media. “The problem is, the analyst going to the meeting knows the purpose and couldn’t help but feel pressured. You are selling your bank.”

Investors both large and small often rely on the recommendations of analysts, who issue buy and sell recommendations on stocks. Questions about the legitimacy of Wall Street research came into focus during the height of the Internet and telecommunications bubble. During that heady time, analysts worked closely with banking colleagues to secure profitable I.P.O. assignments from fast-growing tech companies.

Mr. Spitzer, as attorney general, spearheaded an investigation that helped solidify his reputation at the time as the “sheriff of Wall Street.” He released incriminating e-mails that showed analysts privately disparaged the very companies they were publicly telling investors to buy. They also showed how influential investment bankers were in securing positive research reports for companies that were either clients of a firm or prospective customers.

In one e-mail, an investor asked Henry Blodget, then a Merrill Lynch analyst, what was so interesting about GoTo.com, an Internet company he was recommending, except for the banking fees that it generated.

“Nothing,” Mr. Blodget replied.

In another e-mail message, Mr. Blodget called InfoSpace, an Internet company that he favored publicly, “a piece of junk.”

Federal regulators barred Mr. Blodget, who now runs Business Insider, a business news Web site, and Jack B. Grubman, another prominent analyst who worked at Salomon Smith Barney, from the securities industry.

In 2003, 10 Wall Street banks agreed to pay a collective $1.4 billion to resolve the government’s accusations. As part of the settlement, the firms agreed to separate their banking and research departments, a move that regulators said would ensure that analysts operated more autonomously.

Analysts were also expressly “prohibited from participating in efforts to solicit investment banking business,” including pitches and road shows. Over the years, that language has been incorporated into rules policed by Finra, the regulator.

There are exceptions. A federal law backed by the banking industry and passed last year, the Jump-Start Our Business Start-Ups Act, watered down the rule. The law, known as the JOBS Act, allows analysts to attend an investment banking pitch in connection with the I.P.O. of an emerging growth company, defined as a firm with less than $1 billion in revenue. Still, Finra’s rules say, “a research analyst may not engage in otherwise prohibited conduct in such meetings, including efforts to solicit investment banking business.”

Questions about whether that rule is being flouted come as the market for initial public offerings is heating up. This year, 122 I.P.O.’s have come to market, raising about $29 billion, an increase of 33 percent over the same period in 2012, according to Thomson Reuters.

A huge chunk of those I.P.O.’s are companies owned by private equity firms, which are looking to cash out their holdings in a buoyant market. The $12.6 billion in proceeds generated by private equity-backed initial public offerings this year has already surpassed the $10.4 billion worth of deals during all of 2012, Thomson Reuters said.

Several big private equity-owned companies are preparing to file I.P.O.’s in the coming months, like the hotelier Hilton Worldwide and the luxury retailer Neiman Marcus. Research analysts have participated in meetings related to the selection of underwriters on those deals.

After being told that analysts were playing a role in I.P.O. solicitations, Mr. Spitzer, now a candidate for New York City comptroller, expressed concern.
“The structure sounds like a slightly too-clever way to circumvent the intent” of the rule, he said.

Rockwell Collins to Buy Arinc, a Flight Systems Company, for $1.39 Billion

Rockwell Collins agreed on Sunday to buy Arinc, a maker of commercial flight systems, from the Carlyle Group for $1.39 billion.

The deal is meant to augment Rockwell Collins’ aviation information management offerings. It will also further move the company away from government work and into commercial work: the latter will represent 54 percent of Rockwell Collins’ business after the transaction is completed.

Arinc is expected to report more than $600 million in revenue for 2013.

“Strategically, this acquisition is a natural fit for Rockwell Collins,” Kelly Ortberg, Rockwell Collins’ chief executive, said in a statement. “It accelerates our strategy to develop comprehensive information management solutions by building on our existing information-enabled products and systems and ARINC’s ground-based networks and services to further expand our opportunities beyond the aircraft.”

Sunday’s deal is also the latest effort by a private equity firm to sell off portfolio companies to cash out on its investments, either through a merger or an initial public offering. Carlyle officials have indicated that the firm will focus on divesting existing holdings slightly more than buying new businesses, taking advantage of high company valuations.

Carlyle, which bought Arinc in the fall of 2007, had run a sales process in recent weeks that reportedly drew the interest of a number of strategic buyers.

Rockwell Collins was advised by Citigroup.

A Buffett Play for the Washington Post Co.?

Now that the Washington Post Company has sold its flagship newspaper, Andrew Bary of Barron's speculates that one possibility down the road for the remaining TV and education company could be a sale to Warren E. Buffett's Berkshire Hathaway.