The U.S. Justice Department and the Federal Bureau of Investigation in New York have begun a criminal probe of JPMorgan Chase & Co. (JPM)’s $2 billion trading loss, a person familiar with the matter said.
The U.S. is looking into whether criminal wrongdoing occurred in relation to the losses the bank reported last week, said the person, who declined to be identified because the matter isn’t public. The inquiry is in its most preliminary stage, the person said.
The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, which regulates derivatives trading, also are examining New York-based JPMorgan’s trading activities, according to people familiar with those probes.
JPMorgan Chief Executive Officer Jamie Dimon said on May 10 that the bank made “egregious” mistakes and that the losses of about $2 billion tied to synthetic credit securities were “self-inflicted.”
Chief Investment Office
The trading occurred in a portfolio of credit investments at a unit of the bank called the Chief Investment Office, which makes trades to balance the bank’s assets and liabilities. The unit made trades in credit default swaps.
The losses, which could increase by $1 billion or more, originated out of a London unit of JPMorgan’s Chief Investment Office, which is generally responsible for managing the bank’s interest rate, foreign currency and other economic risks.
The company was trying to reposition a portfolio of corporate credit derivatives and used a trading strategy that was “flawed, complex, poorly conceived, poorly vetted and poorly executed,” Dimon told shareholders today at the bank’s annual meeting in Tampa, Florida.
At the end of an investigation, the U.S. may consider filing mail, wire and securities fraud charges, which give prosecutors “enormous” discretion, said Ellen Podgor, a professor at Stetson University College of Law in St. Petersburg, Florida.
‘Don’t Need Much’
“You don’t need much if the government decides it would like to proceed,” Podgor said in a telephone interview.
Larry Hamermesh, a former lawyer with the SEC who is now a professor at Widener University School of Law, said an investigation into whether criminal wrongdoing occurred may take some time.
“Just because things fail doesn’t mean that there’s a crime,” Hamermesh said in a telephone interview.
He said the U.S. may want to scrutinize the trader who took the position and supervisors who “bear the responsibility for what was said to investors.”
“These cases are not easy to win and criminal liability under securities law depends on a show of intention to mislead,” Hamermesh said. “If it’s simply a screw-up that’s not going to get the government to home base with a jury.”
Joseph Evangelisti, a spokesman for the bank, declined to comment on the criminal probe. Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment. Robert Nardoza, a spokesman for U.S. Attorney Loretta Lynch in Brooklyn, New York, where JPMorgan has some of its operations, also declined to comment.
The probe was reported earlier by the Wall Street Journal.