March 20, 2023

DealBook: New Fraud Inquiry as Trading Loss Mounts at JPMorgan

Jamie Dimon, chief of JPMorgan Chase, entered his bank's Manhattan headquarters on Friday.Jin Lee/Associated PressJamie Dimon, chief of JPMorgan Chase, entered his bank’s Manhattan headquarters on Friday.

9:07 p.m. | Updated

JPMorgan Chase disclosed on Friday that losses on its botched credit bet could climb to more than $7 billion and that the bank’s traders may have intentionally tried to obscure the full extent of the red ink on the disastrous trades.

Mounting concerns about valuing the trades led the company to announce that its earnings for the first quarter were no longer reliable and would be restated. Federal regulators, who were already examining the trades, are now looking at whether employees of the nation’s biggest bank by assets intended to defraud investors, according to people with knowledge of the matter.

The revelations left Jamie Dimon, the bank’s chief executive, scrambling for the second time within two months to contain the fallout from the trading debacle. It has already claimed one of his most trusted lieutenants, compelled Mr. Dimon to appear before Congress to account for the blunder and prompted the bank to claw back millions in compensation from three traders in London at the heart of the losses. A top bank official said that the board could also seize pay from Mr. Dimon, but did not indicate that it would do so.

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Since announcing initial losses of $2 billion in May, Mr. Dimon, once vaunted for his risk prowess after navigating the bank deftly through the financial crisis, has worked to prove that any flaws in risk management are limited to the chief investment office, a once-obscure unit with offices in London and New York. But the latest news is prompting fresh questions about whether risk controls throughout the bank are weak.

“This points to fundamental and potentially widespread risk management failure,” said Mark Williams, a professor of finance at Boston University, who also served as a Federal Reserve Bank examiner.

Much more than profits are at stake for Mr. Dimon. The mounting problems from the soured bets strengthen the hand of lawmakers in Washington who have been pushing to curtail the kind of risk-taking that led to the trading losses.

The possible deceptions came to light in a regulatory filing early Friday just before the bank reported its second-quarter earnings. While the bank posted a profit of nearly $5 billion despite the trading losses of $4.4 billion for the quarter, some analysts and regulators zeroed in on the valuation of the trades.

“If traders misrepresented a fact with the intent to defraud, they can be subject to criminal charges,” said Alan R. Bromberg, a securities law expert at Southern Methodist University.

In contrast, investors appeared to accept Mr. Dimon’s pledges that the bank had rooted out the problems and could reap record annual profits. They rallied behind the bank, sending its shares up nearly 6 percent, the best among its peers on an overall strong day for American stocks.

If the trades had been properly valued, the bank said it would have lost $1.4 billion on the position in the first quarter, bringing the total losses to $5.8 billion so far this year. In a conference call with analysts on Friday, Mr. Dimon said that the trade, under the worst market conditions, could result in another $1.7 billion in losses.

In a rare move, the bank seized millions in pay from three managers in the unit’s London office who had “direct responsibility” for the blunder. People with knowledge of the clawbacks said that pay was taken back from Achilles Macris, Javier Martin-Artajo and Bruno Iksil, the trader who gained infamy as the London Whale for his large credit trades.

A lawyer for Mr. Makris declined to comment. A lawyer for Mr. Martin-Artajo could not be reached. Raymond Silverstein, a lawyer for Mr. Iksil, said his client believed he had “done nothing wrong and that he will be exonerated in due course.” While the company did not indicate the total tally for the clawbacks, Douglas Braunstein, the bank’s chief financial officer, said the bank could claim roughly two years of total compensation, including stock options.

Ina R. Drew, the senior executive who resigned as head of the chief investment office shortly after the trading losses, volunteered to give back her pay. The giveback is a precipitous fall for Ms. Drew, once one of Mr. Dimon’s most trusted executives. Ms. Drew earned roughly $14 million last year, making her the bank’s fourth-highest-paid officer. Ms. Drew declined to comment.

JPMorgan said that an internal investigation, led by Mike Cavanagh, a former chief financial officer at the bank, unearthed questions about how traders in the bank’s chief investment office were valuing their bets. After combing through thousands of e-mails and phone call records of traders, senior executives at the bank feared that traders, in an attempt to disguise the magnitude of the losses, improperly marked their trades.

“Certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter,” the bank said in a statement, but didn’t indicate how many traders may be embroiled in the mismarking.

Certain tough-to-exit trades can be extremely difficult to value, according to current and former traders in the chief investment office. On some positions, “valuing a trade is like throwing a ball at a target while blindfolded,” said a former trader who requested anonymity because of the continuing investigations into the trade. The Securities and Exchange Commission, which is one of several federal regulators investigating the trading losses, is interested in the valuation of the trades, according to a person briefed on the investigation.

Separately, federal regulators from the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York stationed at the bank’s Manhattan headquarters have been examining the valuation of the trades in weekly meetings with the staff at the chief investment office, according to current regulators who insisted on anonymity because the investigations have not concluded.

Mr. Cavanagh said that the executives within the unit were outmatched by the increasing complexity of the bets being made as the unit grew over the last several years. JPMorgan, Mr. Cavanagh, emphasized, is undertaking a “complete revamp of C.I.O. management.” Part of that change began Friday, when the bank announced that Irvin Goldman, who had overseen risk for the chief investment office, was resigning.

Started roughly five years ago, the unit, which grew from a sleepy operation into a profit center, was also torn by internal strife between deputies in New York and London, according to current and former traders.

Mr. Dimon emphasized that the investment office was going to focus on conservative investments. The bank has moved the majority of the soured trade to JPMorgan’s investment banking unit, where Mr. Cavanagh told analysts risk controls were strong.

Mr. Braunstein, the chief financial officer, told analysts that the decision to refile first-quarter earnings was made on Thursday, the day before the bank reported its second-quarter results. The change means that revenue for the first quarter fell by $660 million, and net income dropped by $459 million.

Mr. Dimon urged analysts Friday to focus on the bank’s overall strength.

The bank reported a $4.96 billion profit for the second quarter, down 9 percent from $5.43 billion a year earlier. Revenue also fell to $22.2 billion, down 17 percent from the same period last year.

“All of our client-driven businesses had solid performance,” Mr. Dimon said.

At one point during the earnings call, Mike Mayo, an analyst with Crédit Agricole Securities, asked whether the bank had reached a “tipping point” where it had become too unwieldy to manage.

Mr. Dimon answered with a succinct “no.”

JPMorgan, for its part, has emphasized that the trading loss is a blip in terms of the bank’s overall profitability. Mr. Dimon added that while the bank is “not proud of this moment, we are proud of this company.”

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DealBook: Detail by Detail, Gupta’s Lawyer Deconstructs Goldman Testimony

It had to have been among the least productive weeks of Lloyd C. Blankfein’s six-year tenure as the chief executive of Goldman Sachs.

For the better part of three days this week, Mr. Blankfein testified at the trial of Rajat K. Gupta, the former Goldman director who is facing charges that he leaked the bank’s secret boardroom discussions to the hedge fund manager Raj Rajaratnam from 2007 to 2009.

Though Mr. Blankfein appeared at ease in the courtroom, he had to clear his busy calendar. He could not monitor the volatility in the financial markets. He could not even check his BlackBerry, to which he has acknowledged something of an addiction. In short, he could not do his job.

Instead, Mr. Blankfein, who has spent most of his career in the fast-paced environment of a trading floor, had to sit still on the witness stand and respond to hours of often-monotonous questions. Lawyers on both sides had him discuss Goldman’s inner workings, from the contents of board meetings to his relationship with his lieutenants.

Goldman has played a starring role in the trial of Mr. Gupta, which wrapped up its third week in Federal District Court in Manhattan before Judge Jed S. Rakoff. The prosecution rested its case on Friday, and the defense began to put on its own witnesses.

Late Friday, after the jury had gone home for the weekend, Gary P. Naftalis, a lawyer for Mr. Gupta, said it was “highly likely” that Mr. Gupta would testify in his own defense next week.

Mr. Naftalis spent much of Friday cross-examining Mr. Blankfein to try to show that some of the information Mr. Gupta is accused of leaking was known by the market and thus not “material nonpublic information” under the insider trading laws.

The line between public and private information is critical in the case, and Mr. Naftalis worked hard to try to erase that line. He showed Mr. Blankfein two reports from analysts who followed Goldman during the 2008 financial crisis. The reports, written by analysts at Merrill Lynch and Oppenheimer, raise the prospect of Goldman buying a retail bank. Both reports came after meetings with top Goldman officials.

“GS Bank Trust?” pondered one report. “Don’t rule it out.”

A rationale for putting the reports before the jury was to minimize damage from the only phone conversation between the two recorded by a Federal Bureau of Investigation wiretap. During that call, in July 2008, Mr. Gupta tells Mr. Rajaratnam that Goldman’s board is considering buying a bank.

A jury convicted Mr. Rajaratnam, who ran the now-defunct Galleon Group hedge fund, of orchestrating an extensive insider trading conspiracy last year.

At times, Mr. Naftalis and Mr. Blankfein often seemed to fight for the jury’s affection. While Mr. Blankfein was being presented with a batch of news pieces about Goldman’s possible purchase of a bank, an article flashed on the overhead screen with a photograph of Mr. Blankfein resting his face on his left hand. This prompted laughter from the jury and spectators.

Mr. Blankfein, seizing the moment, mimicked the pose from the witness stand, leading to more cackling in the courtroom.

Comparing Mr. Blankfein’s pose against the photograph, Mr. Naftalis instructed the chief executive to move his hand “down and a little to the left.”

As he left the courtroom, Mr. Blankfein acknowledged the jury with a nod and a smile.

Before resting their case on Friday, prosecutors played several secretly recorded short voice mail messages left by Mr. Gupta on Mr. Rajaratnam’s cellphone. During one on Oct. 10, 2008, a time of market turmoil during the financial crisis, Mr. Gupta says: “Hey Raj, Rajat here. Just calling to catch up. I know it must be an awful and busy week. I hope you are holding up well. Uh, and I’ll try to give you a call over the weekend just to catch up. All the best to you, talk to you soon. Bye bye.”

Mr. Gupta’s lawyers have said that by October 2008, Mr. Gupta had lost his entire $10 million in a Galleon fund and had a falling-out with Mr. Rajaratnam and thus had no interest in passing along insider tips. The friendly tone of the voice mail message was the prosecution’s effort to debunk that theory. Reed Brodsky, a prosecutor, rested the government’s case after playing the recordings.

For the last 45 minutes of the day, the jury watched the defense’s videotaped deposition of Ajit Jain, a top lieutenant at Berkshire Hathaway and a top contender to succeed Warren E. Buffett, Berkshire’s chief executive.

Mr. Jain, a friend of Mr. Gupta’s, testified about the acrimony that had developed between Mr. Gupta and Mr. Rajaratnam. He said that during a lunch in January 2009 at an Italian restaurant in Stamford, Conn., Mr. Gupta told him about the bad blood.

“He told me that he had $10 million invested and he had been gypped, swindled and cheated by Raj and had lost his $10 million.”

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DealBook: In Court, Gundlach Denies Using Trade Secrets

Jeffrey Gundlach of DoubleLine Capital testified in a Los Angeles court on Thursday.Pool photo by CVNJeffrey Gundlach of DoubleLine Capital testified in a Los Angeles court.

LOS ANGELES — In a courtroom here, Jeffrey E. Gundlach, one of the most prominent bond managers in the country, on Thursday defended himself against claims that he had planned to sabotage his former employer, Trust Company of the West, by using stolen data and client information to start a competing firm.

“I took my responsibility at TCW very seriously, “ he testified. “I loved TCW.”

The trial involving Mr. Gundlach and TCW, as Trust Company of the West is better known, resembled a breakup tale as Mr. Gundlach detailed his falling out with TCW, which fired him in December 2009. Soon afterward, TCW sued Mr. Gundlach, accusing him of breaching his fiduciary duty and stealing trade secrets to start his new firm, DoubleLine Capital. TCW is seeking more than $375 million in damages.

On the witness stand, Mr. Gundlach, dressed in a gray pinstripe suit and a blue tie, told the jury of seven men and five women that although he and his colleagues had once made preparations to leave TCW, including looking at office space and registering a Delaware corporation, he had “mothballed” those plans by the time he was fired in December 2009.

When a TCW lawyer asked him about a DoubleLine logo he helped design as early as July 2008, he played it down as a “doodle.”

“I’m very interested in the artwork of Piet Mondrian,” Mr. Gundlach said. “I was wondering if I could make a convincing Mondrian.”

So far, TCW’s case against Mr. Gundlach has hinged on testimony that he and his lieutenants took confidential and proprietary data for use at the new firm. Also named as co-defendants in TCW’s lawsuit are former employees Cris Santa Ana, Barbara VanEvery and Jeffrey Mayberry, all of whom currently work at DoubleLine.

All three have all testified that they downloaded TCW information to external hard drives, but have said that none of the data was used at DoubleLine. Mr. Santa Ana has testified that Mr. Gundlach told him to download information, a claim Mr. Gundlach disputed on Thursday. After Mr. Gundlach was fired in December 2009, more than 40 of his TCW team members followed him to DoubleLine.

“Anything that was downloaded, we never used at DoubleLine,” Mr. Gundlach said in a taped deposition that was played for the jury.

The trial is notable for occurring at all. Most financial employment disputes are settled quietly, but Mr. Gundlach said in an interview this week that the settlement offers he received from TCW were “worse than losing in court.”

In a countersuit, Mr. Gundlach is seeking more than $500 million, claiming that he was a victim of a conspiracy to oust him from the firm.

For a case involving the sleepy mutual fund world, the testimony has at times been shockingly personal. So far, witnesses called by TCW have testified that Mr. Gundlach was “a cultural cancer” who referred to himself as “the Pope” and “the Godfather.”

In an interview this week, Mr. Gundlach said he did not expect his aggressive personality to be a factor in the trial.

“The fact that they don’t like me doesn’t mean I’ve breached my fiduciary duty,” he said.

Earlier in the day, Richard Villa, TCW’s chief financial officer, told the jury that Mr. Gundlach had been paid more than $40 million in 2009, the year he was fired, and that he had had earned compensation totaling about $240 million for the years from 1991 to 2009.

A rare moment of levity occurred during the court session when, in his taped deposition, Mr. Gundlach was asked by John B. Quinn, a lawyer for TCW, if he knew of any data at TCW, other than a portable alpha trading system, considered proprietary.

After a long pause, Mr. Gundlach responded, “A recipe in the dining room?”

Mr. Gundlach will continue his testimony on Monday.

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