U.S. authorities are interviewing witnesses in both the United States and Europe to determine if three former London-based traders and others who worked with them at JPMorgan tried to hide some of the mounting losses during the first quarter of this year, said people familiar with the situation.

The situation presents several challenges to U.S. authorities: the potentially irregular trading occurred in London; and it was carried out by non-U.S. citizens, such as French national Bruno Iksil, who became known in the market as the "London Whale" for the size of his positions.

That translates into different rules for different jurisdictions and could raise extradition issues if any individuals are charged.

Meanwhile, the bank's own internal investigation, which first uncovered evidence in July that the London traders may have deliberately understated the first-quarter loss, is far from finished. A person familiar with the internal probe, but who is not authorized to speak publicly about it, said "there is a lot more work to do" for the team, which has numbered more than 100 lawyers.

Dimon initially referred to what has become a scandal as a "tempest in a teapot". He later tried to portray it as an isolated risk management problem that the bank has corrected.

Lawyers say because JPMorgan is the biggest bank in the United States and Dimon is one of Wall Street's most visible chief executives, U.S. criminal investigators are not going to simply accept the findings of the bank's internal investigation - no matter how thorough they may be.

"I think they are quite careful to not stop with looking at the narrative presented by the bank," said Daniel Richman, a professor at Columbia Law School and a former federal prosecutor.

The U.S. Securities and Exchange Commission is also investigating along with U.S. criminal authorities. Representatives for the SEC and Manhattan U.S. Attorney Preet Bharara declined to comment.

LINE IN THE SAND

Dimon's own internal probe, which has forced the bank to restate and reduce its first-quarter earnings by $459 million, also could generate more headaches if it uncovers fresh problems with past financial reports or credibility-wrecking details about his management team. Either could seriously wound JPMorgan, which lost $26 billion in market value in the first two weeks after Dimon admitted he had been wrong in downplaying the situation.

Jill Fisch, a corporate law professor with the University of Pennsylvania, said a credible internal investigation must not only look at the period that the trading losses occurred but earlier periods to ensure that those quarters when the bank's chief investment office was reporting big profits were also legitimate.

"Doing a high-quality investigation," is helpful in dealing with the SEC and federal prosecutors, she said.

Dimon offered a clear challenge to outside investigators to check his narrative when he drew a line of sorts between the London traders blamed for the losses, and Ina Drew, long one of his most-trusted and top-paid executives and the former head of JPMorgan's chief investment office.

In announcing the bank had found evidence the traders may have used improper valuations to hide the losses, Dimon went out of his way to praise Drew during a July 13 conference with analysts. He said Drew "acted with integrity and tried to do what was right for the company at all times."

If Dimon's assessment of Drew turns out to have been too hasty, it would damage his credibility further. It was Drew's department that told Dimon early on that the derivatives portfolio would lose no more than $250 million.

Drew, who lives in suburban New Jersey, resigned shortly after the scandal broke and offered to surrender two years of pay. The bank accepted her offer.

She is at least one of six former and current JPMorgan employees, including the three former London traders, who have hired lawyers in connection with the inquiries. All of the lawyers either declined to comment or did not return phone calls seeking comment.

The trader at the heart of the case, Iksil, recently hired counsel in Paris, as well as criminal defense attorneys in Washington. Two of Iksil's former superiors, Achilles Macris and Javier Martin-Artajo, have also hired lawyers in New York and London.

In the chain of command in the chief investment office, Martin-Artajo reported to Macris, who reported to Drew.

JPMorgan fired the three men and the bank has said it will try to take back their pay.

Iksil, in hiring Paris lawyer Jean-Francois Davené of the firm Wenner, delivered a reminder that his French citizenship could further complicate efforts to bring him to the United States for trial, or obtain evidence and testimony from witnesses abroad.

SWISS CONNECTION

JPMorgan's situation has a recent precedent that is proving useful to government investigators and the bank. Earlier this year the government charged traders in both New York and London for Credit Suisse Group AG with mismarking a book of mortgage-backed securities. They hid $540 million of losses, according to charges filed in the case, in a trading scandal that dates back to 2007 at the start of the financial crisis.

The Credit Suisse case, which is serving as a reference for the JPMorgan probe, resulted in two guilty pleas to criminal charges. But Credit Suisse was not charged in the case. Instead the SEC praised the bank because of "the isolated nature of the wrongdoing and Credit Suisse's immediate self-reporting to the SEC and other law enforcement agencies."

If JPMorgan executives could win praise like that, it would be a step toward restoring the bank's reputation.

"It changes the tenor of the discussion if Morgan can be portrayed as the victim," said Peter Henning, a Wayne State University law professor who specializes in white collar crime.

Still, it took Credit Suisse four years after conducting its month-long internal probe to get the all clear from authorities.

On February 1, U.S. prosecutors announced the filing of criminal charges against three former Credit Suisse employees, two of whom pleaded guilty to conspiring to falsify the bank's accounts. The third employee, Kareem Serageldin, a U.S. citizen living in London, was indicted in federal court in New York, but has yet to come to the United States to face the charges.

Legal experts say law enforcement is likely to move much faster with JPMorgan's bigger and more prominent trading loss. But that said, the London Whale investigation involves more complex financial instruments and an overall loss that is 10 times bigger than the one incurred in the Credit Suisse situation.

(Reporting by David Henry and Emily Flitter; Editing by Jennifer Ablan, Matthew Goldstein and Leslie Gevirtz)

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