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Ex-JPMorgan Traders Could Face 20 Years in Prison (Update 1)

Updated from 10:23 a.m. EDT with comments from CEO Jamie Dimon's memo to employees

NEW YORK (TheStreet) -- Two former JPMorgan Chase (JPM) traders have been indicted for allegedly engaging in securities fraud in hiding trading losses from a botched derivative trade last year.

A federal court in Manhattan named Javier Martin-Artajo, who oversaw trading strategy for the synthetic portfolio at the bank's chief investment office in London, and Julien Grout, a trader who worked for him, in the indictment, according to Bloomberg.

The Department of Justice filed criminal charges against the traders in August. The charges included four counts of conspiracy, wire fraud, falsification of records and falsification of filings with the Securities and Exchange Commission. The indictment unsealed Monday added a fifth charge -- securities fraud -- which carries a maximum prison sentence of 20 years.

Bruno Iksil, the man behind the infamous "London Whale" trades, has not been charged in return for his cooperation.

The Justice Department intends to show that the two traders named in the indictment along with other un-named co-conspirators artificially inflated the value of the securities and hid the true nature of the losses from senior management.

Artajo and Grout, who live in Europe, have not surrendered themselves to the U.S. authorities.

JPMorgan has not been criminally accused of wrongdoing. The bank, however, is facing multiple regulatory inquiries related to the trading losses.

It is expected to shortly announce a settlement with multiple regulators that could exceed $700 million. The SEC may require the bank to admit that it had inadequate controls and failed to adequately supervise the traders.

Chief Financial Officer Marianne Lake has said legal losses in the third quarter could top $1.5 billion, in the wake of a crescendo of legal lawsuits filed recently against the bank on a range of alleged violations.

In a letter to employees Tuesday, CEO Jamie Dimon warned that there could be more legal woes ahead in the next few weeks but said compliance was the No. 1 priority for the entire bank.

"If you don't acknowledge mistakes, you can't fix them and learn from them. So now, as in the past, we are recognizing our problems, rolling up our sleeves and fixing them," he wrote.

JPMorgan has added 4,000 people to its control efforts (3,000 in 2013 alone) and has spent $1 billion on compliance efforts.

It has increased spending in technology in the regulatory and control space by 27% in 2011.

The bank is exiting non-core businesses including student lending and the physical commodities sales and trading businesses.

In addition, the bank is also focusing on "building and open and more transparent relationship with regulators," the CEO said.

"Never before have we focused so much time, effort, brainpower, technological power and money on a single, enterprise-wide objective. Make no mistake -- we are going to get this right," he wrote.

Shares of JPMorgan were down 0.1% at $53.06 Tuesday afternoon.

Analysts have remained positive in their outlook for the bank, maintaining that valuations remain cheap despite the litigation risk.

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-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

Stock quotes in this article: JPM 
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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