UK: "This One's Just A Tiddler, Throw Him Back To Sea"

Last Updated: 26 March 2015
Article by Richard Caird, Felicity Ewing and Alexandra Doucas

FCA's decision to terminate investigation into Julien Grout's role in the London Whale affair upheld

Julien Grout was one of four individuals investigated by the FCA in connection with the London Whale affair, in respect of which JP Morgan was fined £137,610,000. The investigation into Mr Grout had not proceeded far, before the FCA decided to terminate it in December 2013.

By that stage, Mr Grout was already the subject of both civil and criminal proceedings in the US, and clearly felt that he was not so much being thrown back into the open ocean as thrown to the lions. Wanting to clear his name, he took the unusual step of applying for judicial review of the FCA's decision not to investigate him further. Mr Justice Males (the Judge) rejected that application in a judgment handed down on 9 March 2015.

The London Whale

The FCA's final notice in relation to the London Whale, and JP Morgan's failures in relation to it, runs to some 60 pages. The history of what went wrong is complex, and it is only Mr Grout's role which is particularly relevant for present purposes. Mr Grout was one of the traders responsible for running a synthetic credit portfolio (SCP) as part of JP Morgan's Chief Investment Office in London. The trades which eventually caused JP Morgan to suffer losses of US$5.8 billion in the first six months of 2012 (according to the judgment) involved selling protection on a specific credit default swap index. Mr Grout's direct superior, Bruno Iskil, had taken a position so large in relation to that index that it was reported to have been distortive. Mr Grout's role was to mark the trades to market on a daily basis.

In order to do so, he did not use the mid-point of the relevant bid-offer spread (nor was he required to do so), but instead marked "aggressively", in the terminology of the final notice, choosing the most favourable end of the spread. Finally (on instructions from SCP management) he mismarked the relevant position entirely, in order to conceal the scale of the losses. While the judgment does not record this, the FCA's final notice states that SCP management had, for five years, encouraged traders to mark to market by providing an estimate of what the traders themselves thought the position was worth. JP Morgan also provided no training to Mr Grout as to how to comply with relevant accounting standards in marking to market. The FCA's final notice also records that for part of the relevant period, Mr Grout maintained his own spread sheet showing what the mid-range mark to market figure should be, and the discrepancy between it and the position which SCP was officially reporting. Mr Grout's position before the Judge was that he essentially did what he was told by Mr Iskil, and did not know that there was anything wrong with it.

Mr Grout was interviewed twice by the FCA in 2013, and transcripts of his interviews were provided to US authorities. He, and one of his superiors, were indicted in the US in September 2013. Mr Iskil was not indicted, but was granted protected witness status and is to give evidence for the prosecution in the forthcoming criminal proceedings.

Two days later, the FCA's final notice was published. Mr Grout was not named, but he claims that he is a person identifiable from the report and should have had the opportunity under section 393 of FSMA to make representations to the FCA on the content of the notice (in the much-reported practice of "Maxwellisation"). He has applied to the Upper Tribunal on that basis, but no decision has been reached.

In December 2013, the FCA decided to terminate its investigations into Mr Grout and the other individual facing criminal charges in the US, although it continued to investigate Mr Iskil and another individual.

Reasons for the FCA's decision

The FCA has the power under section 168 of FSMA to appoint investigators. It also has the power under section 170(8)(c) to require an investigator to discontinue an investigation. The FCA's reasons for doing so in this case were set out in an internal report, and were in summary:

  1. the existence of the US proceedings, civil and criminal (which the report said might well have led the FCA to stay its investigation at a relatively early stage in any event);
  2. the fact that Mr Grout no longer lived in the UK or worked in the financial services industry (the report recorded that he was unlikely to do so again, given the publicity surrounding the London Whale matter); and
  3. in light of both of the above, the "significant commitment in both resource and time" required by the investigation would be disproportionate.

Grounds of review and the Judge's decision

The Judge noted that the court was reluctant to interfere with decisions of authorities as to how to allocate resources, and with decisions of independent prosecutors and investigators as to whether or not to initiate, pursue or terminate an investigation. He cited three reasons for this, namely that: (i) the relevant powers are entrusted to that authority and no one else; (ii) such decisions are typically "polycentric" and involve a balance of considerations as to policy and public interest; and (iii) the powers conferred are in broad and unprescriptive terms.

However, the Judge also noted that there were constraints on the FCA's freedom of decision-making. In particular, he noted that it must:

  1. act lawfully and in good faith;
  2. not come to a decision which is irrational, in the sense that no reasonable authority could ever come to it, and that factors which might indicate irrationality would include:
    (a) applying different treatment to people in the same position; and
    (b) placing "manifestly disproportionate" weight to a particular consideration.

Mr Grout argued that the FCA had reached an irrational decision, including for the two reasons referred to at (a) and (b) above, for reasons considered further below.

However, the Judge also dealt with two points made on behalf of Mr Grout, but which did not form part of his formal grounds for judicial review. The Judge's treatment of these points may be of more general interest than his consideration of the specific challenges made to this particular decision.

First, the Judge noted that Mr Grout was motivated to seek judicial review by a wish to clear his name, and said that he would have rejected this as an argument had it been advanced as a ground of review. He said that the damage to Mr Grout's reputation had been caused by the publicity of the London Whale affair, not by the FCA, and that he doubted whether it would be a proper use of the FCA's resources to pursue an investigation simply to establish that no misconduct had occurred. Finally, he said that Mr Grout had the opportunity to use the US proceedings to clear his name. The latter comment by the Judge is less straightforward than it might appear. Mr Grout is a French national, resident in France, and apparently cannot be extradited to the US. On that basis, his attendance or otherwise at his trial there, as and when it takes place, is optional. If attendance is his only chance to clear his name, he will have to consider whether that is worth the risk involved.

The Judge also noted in the judgment that if Mr Grout was successful in applying to the Upper Tribunal under section 393 of FSMA, this would also afford him an opportunity to clear his name. This, however, seems a somewhat more limited tool. Mr Grout will only ever, presumably, win the right to make representations in relation to the content of the final notice. As that notice does not directly address his role, it may not result in him having the opportunity to say all that he might wish.

The second, informal complaint made on behalf of Mr Grout and addressed by the Judge was that the FCA had not consulted him prior to deciding to terminate its investigation. The Judge said that he saw no basis for imposing on the FCA a duty to consult the subject of an investigation prior to terminating it. By extension, this conclusion would presumably apply to other decisions taken by the FCA pursuant to its investigatory powers.

Differential treatment

Mr Grout argued that the FCA acted irrationally in discontinuing the investigation in relation to him, but continuing to investigate Mr Iskil and another individual in relation to the same matters. The Judge rejected this argument on the basis that Mr Grout was not in the same position as these individuals. He was junior to them at JP Morgan (and therefore might reasonably be of less interest to the FCA), and (unlike them) was subject to on-going proceedings in the US.

Weight placed on US proceedings

Mr Grout alleged that the FCA placed too much weight on the existence of the criminal proceedings in the US in reaching its own decision. The Judge noted that in order to persuade him to disturb the FCA's decision on this ground, Mr Grout had to show that the FCA had placed manifestly disproportionate weight to this consideration. He failed to do so.

In what the Judge described as an odd submission, it was argued on behalf of Mr Grout that too much weight was given to the US criminal proceedings because they would operate unfairly against him. It was acknowledged that the FCA could take the US proceedings into account, so long as not too much weight was placed on them given their potential unfairness. The point is not expanded in the judgment, but it may be that Mr Grout considered this from the perspective of his opportunity to exonerate himself. That might well be diminished by a prejudicial trial process, but as the judgment says, exoneration of Mr Grout was unlikely to be a substantial factor in the FCA's decision-making process.

Three arguments were raised in support of Mr Grout's argument that there were obstacles in the way of him getting a fair trial. First, it was noted that Mr Iskil was immune from prosecution and would have every incentive to cast blame on Mr Grout. The Judge took the view that the trial jury would be capable of taking this possibility into account when weighing the evidence. Second, it was noted that Mr Grout would not have access to some of the prosecution evidence until after the start of the trial, including the full testimony of Mr Iskil. The Judge said that Mr Grout appeared to have the gist of that testimony, and that it was not suggested that his lawyers would lack time to respond to it. Finally, it was argued that the timing of the criminal trial was uncertain. The Judge said that the timing of any investigation by the FCA was also uncertain, particularly if it was stayed pending the outcome of the criminal trial.

Time and resources

Mr Grout finally argued that as the FCA was continuing its investigations into two other individuals in relation to the same matters, it was irrational to terminate the investigation into him on the basis that it was a disproportionate use of time and resources. The Judge rejected this argument, on the basis that the FCA's resources were finite, and it was for the FCA to decide how it used them.


The degree of sympathy felt for Mr Grout will doubtless vary according to the audience, and it does not appear (from various comments made in the judgment) that the Judge was particularly touched by his plight. Legally, the fact of this request for judicial review is more surprising than its outcome. The Judge largely confirmed what many would have expected, namely that courts will interfere very sparingly in the decisions taken by independent prosecuting agencies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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