In 2007 JP Morgan Chase had $500 million in client assets in a Sigma investment vehicle. Recently unsealed documents show that top JP Morgan management had been warned at that time about these investments, but did not move their clients’ money. In fact, while the clients lost nearly all their money, its alleged in a lawsuit that JP Morgan made nearly $1.9 billion by betting on Sigma’s collapse. That’s because as Sigma’s troubles worsened, JP Morgan lent the vehicle billions of dollars and received valuable assets in the form of a security deposit.
A class action filed by several pension funds accuses JP Morgan of breaching its responsibility to keep its clients in safe investments. It’s alleged that in the summer of 2007, JP Morgan invested the pension fund’s money in notes issued by Sigma that would be repaid based on how Sigma’s financial bets performed. Documents reveal that by August of that year JP Morgan executives elsewhere in the bank began to worry about Sigma and other similar entities call structured investment vehicles, or SIVs.
A number of emails circulating among upper management discussed the real probability that the whole sector was in trouble and that JP Morgan, on behalf of its clients, was among the top 12 SIV investors. In fact the bank’s chief risk officer wrote that JP Morgan needed to protect the bank’s position and not worry about what its clients were invested in.
By early 2008 JP Morgan had made a number of trades with Sigma even as internal documents indicated that management did not believe Sigma would survive, essentially betting the bank’s money on Sigma failing and clients’ money on Sigma thriving. When Sigma defaulted later that year, JP Morgan had lent it a total of $8.4 billion and had received $9.3 billion of assets as a security deposit. The suit indicates that the value of those assets rose and that JP Morgan recorded a gain of $1.2 billion on assets it held as well as making $228 million in fees from Sigma in exchange for loans.
JP Morgan clients, the pension funds, were not so fortunate. The suit states their $500 million became worth 6 cents on the dollar. The industry is watching this case closely as JP Morgan argues its various units could not share information due to Chinese Walls meant to prevent the spread of non-public information within the firm. However, that argument is greatly weakened by the fact that the documents show the information transcended departments and went all the way to top bank executives. The issue ultimately will be whether executives had a duty to share information that adversely affects their clients’ investments. If you need additional information on this subject, contact Scarlette Tuley at 800-898-2034 or by email at Scarlette.Tuley@beasleyallen.com.
Source: The New York Times
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