The Curious Case of Hernan Arbizu

Jun.27.08 | About: JPMorgan Chase (JPM)

To read the English-language coverage of J.P. Morgan Securities Inc. v. Arbizu, a case in the Southern District of New York, it's all pretty boring. A private banker named Hernan Arbizu was employed by JP Morgan (NYSE:JPM), looking after clients in Argentina and Chile. JP Morgan then discovered that he was committing fraud; they fired him, and are now suing him.

The coverage in Argentina, by contrast, is so different you'd almost think it's a different case entirely. "EL MORGANGATE" screamed the front page of Crítica de la Argentina last week, complete with a picture of dollar bills being hung out to dry on a clothesline. The whole issue of the magazine can be read in pdf form here, and makes for eye-opening reading: Splashed across four pages is a list of 200 or so JP Morgan private-banking clients, complete with account numbers and the amount of money in their accounts.

An update from Crítica can be found here; the main Argentine financial daily, Clarin, has also been following the case, but maybe not quite assiduously as it might, since accounts belonging to Clarin were among those on the list. In Argentina, at least, this isn't a simple fraud case; this is all about money laundering and tax evasion by some of Argentina's wealthiest citizens. According to Arbizu, who seems to be painting himself as some kind of whistleblower, his job at JP Morgan entailed helping clients to hide the fact that they actually owned certain assets, in order to evade national tax authorities. Arbizu took his client list and his allegations to the Argentine police, who reportedly raided JP Morgan's offices in Buenos Aires shortly before JP Morgan's suit against Arbizu was filed.

JP Morgan vehemently denies that they would ever help a private-banking client evade taxes or commit any kind of fraud, and quite reasonably are painting themselves as the victim in this case. Their evidence has certainly persuaded Southern District judge James Francis to issue an arrest warrant for Arbizu; quite aside from JP Morgan's civil case, there's now a criminal case pending against Arbizu as well. He is charged with transferring $2.8 million out of a client's account without that client's knowledge or permission; if convicted, he could face up to 30 years in jail as well as a $1 million fine.

That said, relations between Argentina and the US are at a low ebb right now, and the chances of anybody being extradited from Argentina on a fraud charge would seem to be slim to nonexistent. Which makes Arbizu's antics particularly weird. After all, he's now being investigated in Argentina, too: His home was reportedly searched this week and boxes of information taken away, although he himself was not arrested. On the face of it, he's admitting in public to criminal behavior for which the Argentines can certainly prosecute him if they're so inclined, and which, if JP Morgan is to be believed, he never even committed. Yes, they say, he illegally transferred money; he fled to Argentina; and he revealed highly confidential information about client accounts. But they deny that that the bank played any part in any money laundering or tax evasion.

So what is Arbizu up to? Once he got to Argentina, couldn't he have simply kept quiet, safe in the knowledge that he was realistically never going to face extradition? Maybe not: It certainly looks as though there's some kind of quid pro quo going on, and that in return for domestic immunity as well as protection from US authorities, Arbizu is handing over to Argentines both judicial and journalistic a great deal of confidential information about Argentine nationals and their finances.

It could be that there's some kind of personal vendetta here: The leak to Crítica, especially, seems to serve no obvious purpose. Or maybe Arbizu was just really annoyed at JP Morgan for some reason, and decided that he was going to embarrass the bank to the greatest extent possible, since at that point he had already been fired and had nothing further to lose. Seeing your clients' names and account details splashed all over a magazine is pretty much any private bank's worst nightmare: the business is built on discretion, discretion, and discretion, so this episode can't help but do serious harm to JP Morgan's franchise in Argentina.

But ultimately we can only guess what the 39-year-old Arbizu is playing at. Interestingly, he didn't steal his client's $2.8 million himself: it seems that instead he transferred it to another client's account, since he'd promised that second client a higher return than he was able to deliver. Which is the kind of above-and-beyond private-banking service that no one wants to receive.

I'm going to be travelling for most of Friday, but I hope that by the weekend I'll have a copy of at least one of the complaints against Arbizu, in which there might be more reliable detail. I'm quite fascinated by this case, and will be very interested to see how it all plays out.