| NEW YORK, July 16
NEW YORK, July 16 In a matter of days, the
two-month-old criminal investigation into a $5.8 billion trading
loss at JPMorgan Chase & Co. -- known as the "London
Whale" blunder -- was transformed from dormant to potentially
Last Thursday, the day before JPMorgan reported its highly
anticipated second-quarter earnings, the bank informed U.S.
authorities that an internal investigation had found evidence
that three London traders may have tried to hide the losses in
some of their positions, said people familiar with the matter.
Late on Thursday evening, JPMorgan also decided it needed to
restate its first-quarter earnings as a result.
The bank's disclosure has breathed new life into the
criminal investigation that up until last week lacked evidence
of a smoking gun pointing to wrongdoing in the bank's Chief
Investment Office, said three people familiar with the matter.
Before last week's disclosure, the criminal probe largely
had focused on the personal trading of some CIO traders, two of
those sources said. The authorities were looking for evidence
that some in London may have sold shares of JPMorgan in advance
of the firm's May 10 disclosure that it could lose a minimum of
$2 billion on the derivatives trades gone awry.
Now the investigation is focused on whether three JPMorgan
employees in London committed fraud in reporting on their
transactions. The bank is cooperating with authorities.
JPMorgan's chief executive, Jamie Dimon, and some of his top
lieutenants did not learn about the potential misconduct by some
CIO employees until early last week, said these sources, who
were not authorized to speak publicly on the matter.
A federal prosecutor assigned to the investigation did not
return calls seeking comment. A U.S. Securities and Exchange
Commission attorney overseeing the matter also did not return
The bank learned of the potential wrongdoing from lawyers
with WilmerHale, the outside counsel hired by JPMorgan to
investigate the matter. The law firm has reviewed thousands of
emails and tens of thousands of recorded conversations between
the traders and also interviewed some of the traders.
The WilmerHale internal review found that "traders may have
been seeking to avoid showing the full amount of losses,"
according to a presentation the bank released on Friday. The
presentation also said the internal review found "a material
weakness" in the valuations the CIO office had used for some of
the more esoteric derivatives it had traded in London.
Assisting WilmerHale in the investigation are lawyers from
Shearman & Sterling, which has been retained by JPMorgan's board
to advise them on the internal investigation.
In a Friday conference call with investors and analysts,
Dimon said the trading loss had "shaken our company to the
core." He also said the problems that led to the big trading
loss had been fixed.
The CIO trading losses haves been an embarrassing affair for
Dimon, long praised on Wall Street for running a tight ship when
it comes to managing risk. In June, Dimon appeared before two
Congressional panels on Capitol Hill to testify about the
Asked why Dimon testified on the Hill before the
investigation was done, bank spokeswoman Kristin Lemkau said:
"The timing of the hearings was the decision of Congress."
So far, the trading loss has cost a number of people their
jobs, including Ina Drew, the former head of the CIO, who
resigned in May. Also gone from the bank are three traders in
London, Bruno Iksil -- who gained fame as the "London Whale" for
his large trades -- Achilles Macris and Javier Martin-Artajo.
Lawyers in London for Iksil and Martin-Artajo did not return
phone calls or email seeking comment. A lawyer in New York for
Macris declined to comment.
A lawyer in New York for Drew did not return request for
comment. A family member who answered the phone at Drew's home
said she was not available for comment.
On Friday, JPMorgan said Drew had offered to return some of
her pay to the bank.
JPMorgan has lost about $20 billion in market capitalization
since May 10.
In its conversations on Thursday with securities regulators
and federal criminal investigators, JPMorgan first disclosed its
concerns about losses being hidden. Later in the day it said it
would likely need to restate first-quarter earnings. The bank
intends to reduce its income by $459 million in light of the bad
valuations and potentially misleading valuations placed on some
On Friday JPMorgan publicly disclosed to investors the
potential wrongdoing by the London traders and the decision to
restate first-quarter earnings, which it said it was doing
because it had "recently identified concerns around the
integrity of traders' markets."