* JPMorgan may lose as much as $1.7 bln more in CIO trades
* CIO will now focus on conservative investments
* Q2 net EPS $1.21 vs $1.27 year earlier
* Shares up 6 percent
By David Henry and Aruna Viswanatha
July 13 (Reuters) - U.S. federal investigators are looking at whether JPMorgan Chase & Co traders hid trading losses that have since grown to $5.8 billion, according to a person familiar with the matter, after the bank said its own probe found reason for suspicion.
JPMorgan, the largest U.S. bank, said it believes it will lose at most another $1.7 billion from the bad credit trades. Problems at the group that made the bets, the Chief Investment Office, have been fixed, said Chief Executive Jamie Dimon. CIO traders had used derivatives to bet on corporate debt.
Investors cheered the bank for capping losses and taking steps to ensure it avoids similar bad bets in the future. JPMorgan's shares rose 6 percent on Friday.
Even with the trading losses, JPMorgan earned nearly $5 billion overall in the second quarter, thanks to its strong performance in areas such as mortgage lending.
The trading losses may be mostly over, but with the disclosure that traders may have lied about their losses, regulatory and legal consequences will linger for some time. Blame for the problems at the CIO office may go further up the management chain to some of the most senior executives at the firm, lawyers said.
The source said that federal criminal investigators are looking at people at JPMorgan in London, where the CIO's risky bets were placed. The criminal investigation began in earnest in the past few weeks after JPMorgan's internal investigation uncovered that CIO traders may have intentionally masked losses, said the source, who is not authorized to speak about the matter and declined to be identified.
"I see little doubt that someone is going to get charged with fraud," said Bill Singer, a lawyer at Herskovits in New York who provides legal counsel to securities industry firms, and publishes the BrokeandBroker website.
Authorities ranging from the FBI to the U.S. Securities and Exchange Commission are probing the bank. The SEC could charge JPMorgan with weaknesses in oversight and internal controls, said James Cox, a securities law expert at Duke University.
"I think the SEC will continue to look at 'What exactly did Jamie Dimon know and when did he know it?'" Cox said.
An internal review found that some of the CIO traders appear to have deliberately ignored the massive size of their trades - and the difficulty in liquidating them - when valuing their positions. The values they reported ended up being too high, which is forcing JPMorgan to restate its first-quarter results. The bank is cooperating with authorities.
The trading losses and possible deception from traders are a black eye for Dimon, who was respected for keeping his bank consistently profitable during the financial crisis. Dimon, who has criticized regulators for meddling too much with banks, has lost credibility because of difficulties in his own house.
"How do we know there are not more roaches in the kitchen?" said Paul Miller, an analyst at FBR Capital Markets, referring to the maxim that seeing a single roach typically means there are far more hiding in the woodwork.
The Chief Investment Office became infamous in May when JPMorgan said bad derivatives bets had triggered about $2 billion of paper losses, a figure that turned into $4.4 billion of actual losses in the second quarter.
One trader in the CIO, Bruno Iksil, took big enough positions in the credit derivatives markets to earn the nickname "The London Whale." He made at least some of the big bets that caused trouble for the bank, and has since left JPMorgan, a source said on Friday.
Ina Drew, who headed the CIO, has also left, and offered to give back as much of her pay as the bank was contractually entitled take back, said Dimon, whose pay could be taken back as well. A spokesman for the bank said JPMorgan had accepted Drew's offer.
The bank said it had moved the bad trades from the CIO, which invests some of the company's excess funds, to its investment bank. JPMorgan was one of the inventors of credit derivatives, and its investment bank is one of the biggest traders of the product on Wall Street.
The CIO will now focus on conservative investments, JPMorgan said. The bank has taken a number of other steps to prevent these types of losses from repeating, including changing the way it limits risk taking in the CIO's office.
"People feel good that the loss is largely contained at this point," said Nancy Bush, a banking analyst at independent research firm NAB Research.
JPMorgan said later on Friday that its former CIO risk officer, Irvin Goldman, had resigned. Goldman "behaved with integrity and we wish him well," JPMorgan said.
JPMorgan's shares rose $2.03 to close at $36.07 on the New York Stock Exchange.
THE TEMPEST LEAVES THE TEAPOT
The bank posted second-quarter net income of $4.96 billion, or $1.21 a share, compared with $5.43 billion, or $1.27 a share, a year earlier.
The derivative loss after taxes reduced earnings per share by 69 cents, the company said.
JPMorgan said it expected to file new, restated first-quarter results in the coming weeks, reflecting a $459 million reduction of income because of bad valuations on some of its trading positions. The bank found material problems with its financial controls during the period.
The bank said its internal investigation combed through over a million emails, tens of thousands of taped conversations, and other evidence. It learned that some traders may have intended not to value their trading positions at the proper levels.
In particular, the traders recorded the value of their trades at current market prices, rather than prices they would get if they liquidated their large positions, in an effort to avoid reporting their full paper losses.
The bank made trades that were intended to protect it against the credit markets tanking, but allowed those positions to morph into bets on credit markets getting better.
Friday's financial report came three months to the day after Dimon, 56, told stock analysts that news reports about Iksil and looming losses in London were a "tempest in a teapot."
That remark, which Dimon told Congress last month was "dead wrong," added to the damage the loss has done to his reputation and his argument that his bank is not too big to be managed safely.
A host of international regulators and agencies are probing the trading mishap. Besides the FBI and the SEC, they the UK's Financial Services Authority, the U.S. Federal Deposit Insurance Corp, the U.S. Commodity Futures Trading Commission, the U.S. Treasury's Office for the Comptroller of the Currency, and the Federal Reserve Bank of New York.