The U.S. Commodity Futures Trading Commission (CFTC) has settled charges against JPMorgan Chase Bank for its unlawful handling of Lehman Brothers, Inc.’s customer segregated funds. The CFTC order imposes a $20 million civil monetary penalty against JPMorgan. The order also requires the company to implement undertakings to ensure the proper handling of customer segregated funds in the future and to release customer funds upon notice and instruction from the CFTC.
The CFTC alleged that from November 2006 to September 2008, JPMorgan was a depository institution serving Lehman Brothers, a futures commission merchant (FCM) registered with the CFTC. During this time, Lehman Brothers deposited its customers’ segregated funds with JPMorgan in large amounts that varied in size, but almost always more than $250 million at any one time. During the same time period, JPMorgan extended intra-day credit to Lehman Brothers on a daily basis to facilitate its proprietary transactions, including repurchase agreements, or repositions. JPMorgan would extend intra-day credit to Lehman Brothers to the extent that the company’s “net free equity” at JPMorgan was always positive.
As of November 17, 2006, that court found that JPMorgan included Lehman Brothers’ customer segregated funds in its calculation of the company’s net free equity, even though these funds actually belonged to Lehman Brothers’ customers, not to the company. The Commodity Exchange Act (CEA) and CFTC regulations prohibit depository institutions, like JPMorgan, from using or holding segregated funds that belong to an FCM’s customer as though they belong to anyone other than that customer, and also prohibit the extension of credit based on such funds to anyone other than that customer. It was alleged by the CFTC that JPMorgan violated these prohibitions in two ways:
• JPMorgan extended intra-day credit to Lehman Brothers for approximately 22 months based in part on Lehman Brothers customers’ segregated funds because those funds were included in JPMorgan’s determination of Lehman Brothers’ net free equity.
• On September 15, 2008, Lehman Brothers Holding, Inc. filed for bankruptcy. Two days later, Lehman Brothers requested that JPMorgan release Lehman Brothers’ customers’ segregated funds. JPMorgan improperly declined the request based on JPMorgan’s determination that Lehman Brothers no longer had positive net free equity held at JPMorgan.
JPMorgan continued to refuse to release these funds for approximately two weeks thereafter, and only released the funds after being directly instructed to do so by CFTC officials. The CFTC order does not find that there were any customer losses. The laws applying to customer segregated accounts impose critical restrictions on how financial institutions can treat customer funds, and prohibit these institutions from standing in the way of immediate withdrawal. These laws must be strictly observed at all times, whether the markets are calm or in crisis.
Source: Corporate Crime Reporter
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