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<DIV><FONT size=2>From: <EM>The New York Times</EM></FONT></DIV>
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<DIV class=timestamp>April 10, 2011</DIV>
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<H1><NYT_HEADLINE type=" " version="1.0">JPMorgan Accused of Breaking Its Duty
to Clients</NYT_HEADLINE></H1><NYT_BYLINE>
<H6 class=byline>By <A class=meta-per title="More Articles by Louise Story"
href="http://topics.nytimes.com/top/reference/timestopics/people/s/louise_story/index.html?inline=nyt-per">LOUISE
STORY</A></H6></NYT_BYLINE><NYT_TEXT>
<DIV id=articleBody><NYT_CORRECTION_TOP></NYT_CORRECTION_TOP>
<P>In the summer of 2007, as the first tremors of the coming financial crisis
were being felt on Wall Street, top executives of <A class=meta-org
title="More information about JPMorgan Chase & Company"
href="http://topics.nytimes.com/top/news/business/companies/morgan_j_p_chase_and_company/index.html?inline=nyt-org">JPMorgan
Chase</A> were raising red flags about a troubled investment vehicle called
Sigma, which was based in London. But the bank chose not to move out $500
million in client assets that it had put into Sigma two months earlier. </P>
<P>Sigma collapsed a year later. Now, <A title="Documents With the Suit"
href="http://graphics8.nytimes.com/packages/pdf/business/0408Exhibits1-25.pdf">new
documents</A> unsealed late last month as part of <A
title="Law Suit against JPMorgan"
href="http://graphics8.nytimes.com/packages/pdf/business/0408PlaintiffsOmnibusBrief.pdf">a
lawsuit</A> by bank clients against JPMorgan show for the first time just how
high the warnings about Sigma went — all the way to the office of the bank’s
chief executive, <A class=meta-per title="More articles about James Dimon."
href="http://topics.nytimes.com/top/reference/timestopics/people/d/james_dimon/index.html?inline=nyt-per">Jamie
Dimon</A>. </P>
<P>While the clients lost nearly all their money, JPMorgan collected nearly $1.9
billion from Sigma’s demise, according to the suit. That’s because as Sigma’s
troubles worsened, JPMorgan lent the vehicle billions of dollars and received
valuable assets in the form of a security deposit. </P>
<P>After Sigma came undone in September 2008, many of those assets ultimately
became JPMorgan’s and eventually appreciated in value, giving the bank a large
profit, the suit says. </P>
<P>The case, which is filed as a class action and includes several pension funds
as named plaintiffs, accuses JPMorgan of breaching its responsibility to keep
its clients in safe investments, and it sheds new light on one of Wall Street’s
oldest problems — whether banks treat their clients’ money with the same care
that they treat their own. </P>
<P>Joseph Evangelisti, a spokesman for JPMorgan, called some of the suit’s
accusations “ludicrous” and said the bank lent more than $8 billion to Sigma to
try to help the vehicle survive, not to profit from its failure. He said the
bank did its best to protect its clients’ money and that its dealings with Sigma
were to the clients’ benefit. </P>
<P>The suit, however, asserts that JPMorgan workers developed a “grand scheme”
to profit from Sigma in the event of a collapse, even though employees at
another part of the bank left client money invested in the vehicle. </P>
<P>One internal e-mail between top executives, for instance, states that the
firm needed to protect its own interests in its dealings with Sigma, without
taking into account the clients’ position. The suit also contends that the
bank’s loans to Sigma gave it access to the vehicle’s best assets, at a
discount, which proved to be a profitable trade for the bank. </P>
<P>JPMorgan has said in a <A title="JPMorgans Brief in the Case"
href="http://graphics8.nytimes.com/packages/pdf/business/0408brief.pdf">court
filing</A> that no such scheme existed and that it acted properly in the way it
managed client money. </P>
<P>The bank argues that by law, different units of the company that dealt with
Sigma could not share information, because of so-called Chinese walls, which are
meant to prevent the spread of nonpublic information within the firm. According
to this argument, the unit that invested client money in Sigma could not confer
with the arm that lent the vehicle money. </P>
<P>But because the information rose to executives who oversee the entire company
and were in a position to intervene, analysts say the issue is trickier. </P>
<P>“In one sense, I don’t think it’s good enough to say, ‘We’re a large
organization, we can’t relay information.’ That, in many respects, is a
cop-out,” said William Fitzpatrick, a banking analyst at Manulife Asset
Management, a Canadian insurance company that is not party to the case. “Does
Jamie Dimon have some sort of veto power where he can overrule it? That gets
very gray.” </P>
<P>But he added, “I can see where the banks would come back and say, ‘The
Chinese walls are there for a reason. We don’t want to put in manual
overrides.’ ” </P>
<P>In many cases, the rules and practices banks follow are based on nonpublic
information they receive. </P>
<P>It’s not as clear what a bank’s obligations are with insights that are based
on public information, like some of the information related to Sigma. </P>
<P>Within the financial services industry, the case is being closely watched. A
victory by JPMorgan’s clients may mean that banks will have to be more careful
about deciding whether to share — or silo — information that affects their
clients’ investments. The Securities Industry and Financial Markets Association,
a prominent trade group, <A title="Text of the brief."
href="http://graphics8.nytimes.com/packages/pdf/business/0408MemoofLawISOMotion.pdf">wrote
a brief in support</A> of JPMorgan last month saying that the pension funds that
are suing had an “unprecedented and novel theory” that “contradicts decades of
Congressional and regulatory guidance.” The trade group said that if the
plaintiffs won, it would impose greater costs on banks. </P>
<P>Whatever the legal outcome, <A title="Additional documents with the suit."
href="http://graphics8.nytimes.com/packages/pdf/business/0408ExA-O.pdf">the new
documents</A> <A title="Additional Documents with the Suit"
href="http://graphics8.nytimes.com/packages/pdf/business/0408ExP-T.pdf">paint</A>
a picture of how one of Wall Street’s strongest players profited in its deals
with the weak. </P>
<P>The events described in the suit, which was filed in Federal District Court
for the Southern District in New York, began in the summer of 2007. That June,
JPMorgan’s unit put about $500 million from pension funds and other clients into
notes issued by Sigma, meaning those clients would be repaid based on how
Sigma’s financial bets performed. </P>
<P>The investments were <A title="New York Times article on securities lending."
href="http://www.nytimes.com/2010/10/18/business/18advantage.html">made by the
bank’s securities lending unit</A>, which stood to share in profits if the bet
was successful but would not share in losses if it wasn’t. </P>
<P>According to the new documents, by that August, JPMorgan executives elsewhere
in the bank began to worry about Sigma and other similar entities called
structured investment vehicles, or SIVs. </P>
<P>Mr. Dimon is named in several documents related to these vehicles. </P>
<P>One e-mail in August 2007 said Mr. Dimon was interested in hearing about “the
systemic risk of a complete unwind of all SIVs,” according to the suit. Another
e-mail told a bank worker to prepare “a very real picture of the assets that
will be unwound with particular focus on Sigma.” At the end of August, Mr. Dimon
received a memo on the SIV market, with a note about Sigma in the cover sheet,
according to the lawsuit. </P>
<P>That same month, a fixed-income executive, John Kodweis, wrote in an e-mail
that he believed it was probable the entire sector would run into trouble. </P>
<P>If that were to happen, the SIVs might have to unload $400 billion in
valuable assets at fire-sale prices, he wrote. He suggested the bank create a
team, which the suit says it did, to take advantage of the forced selling. </P>
<P>In the same e-mail, Mr. Kodweis noted that the block of SIV investments that
JPMorgan had made on behalf of its clients was among the top 12 investors in all
SIVs. </P>
<P>Other top officials at the bank were also aware of the conflict. In September
that year, as the bank’s top brass considered lending money to Sigma, the bank’s
chief credit officer, Andrew Cox, wrote that “I have heard JPM Asset Mgmt are
large buyers of SIV and Sigma CP,” referring to short-term debt called <A
class=meta-classifier title="More articles about commercial paper."
href="http://topics.nytimes.com/top/reference/timestopics/subjects/c/commercial_paper/index.html?inline=nyt-classifier">commercial
paper</A>. “Do we need to consider the firmwide position?” </P>
<P>The bank’s chief risk officer, John Hogan, wrote back that JPMorgan needed to
protect its own position and not worry about what its clients were invested in.
</P>
<P>By February 2008, credit continued to tighten, and Sigma was desperate for
cash to finance its operations. An executive in JPMorgan’s London office, Mark
Crawley, wrote that it was “unlikely” that Sigma would survive. He also said
there could be risks to the bank’s reputation if it went ahead with the loan.
Still, JPMorgan proceeded. </P>
<P>As time passed in 2008, bank executives did more trades with Sigma. </P>
<P>Mr. Crawley e-mailed Mr. Cox to say that the bank was treating its loans to
Sigma as a “trade,” rather than as support for Sigma and that there were “very
big moneymaking opportunities as the market deteriorates” because Sigma had what
he called high-quality assets. </P>
<P>Mr. Cox described Sigma’s health as “a race against time” in a note to Bill
Winters, then co-head of the investment bank, and Mr. Crawley. </P>
<P>By September 2008, when Sigma defaulted, JPMorgan had lent it a total of $8.4
billion and had received $9.3 billion of assets as a security deposit, according
to the suit. The value of the collateral was dubious at that point, given the
panic of the financial crisis, and it was unknown if the assets would decrease
in value. </P>
<P>But a year later, many investments had risen in value, the suit says.
JPMorgan made over $470 million in profit within a year of the default by
selling off some of the collateral and had recorded a paper gain of $1.2 billion
on assets it still held, according to the suit. The bank had also made $228
million in fees from Sigma in exchange for the loans. The total gain was nearly
$1.9 billion, the suit says. </P>
<P>The pension funds whose money JPMorgan had put into Sigma lost nearly all of
their investment. The suit said their $500 million became worth 6 cents on the
dollar. </P>
<P>Mr. Evangelisti, the JPMorgan spokesman, said the bank disputed the profit
figures but he would not say how much the bank believed it made on the Sigma
transactions. </P>
<P>He also said the unit that put the client money in Sigma “closely monitored”
the investment and did its best to decide whether to sell it early. He said a
different client investment in Sigma was repaid in full to JPMorgan clients just
weeks before Sigma collapsed. </P>
<P>The bank also said in a court filing that it would have been irrational for
its executives and traders to try to obtain Sigma’s assets by lending money to
the vehicle. The bank could have instead just purchased some of those assets,
though they might have come at a higher price. </P>
<P>In addition, Mr. Evangelisti said it was Sigma that approached JPMorgan about
the loans, and Sigma executives told the bank the loans would help the JPMorgan
clients who were Sigma investors. </P>
<P>He added that in the fall of 2008, when it came time for the bank to auction
off some of the assets JPMorgan had received from the failed vehicles, “in many
cases there were no takers.” </P><NYT_CORRECTION_BOTTOM>
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class=articleCorrection></DIV></NYT_CORRECTION_BOTTOM><NYT_UPDATE_BOTTOM></NYT_UPDATE_BOTTOM></DIV></NYT_TEXT><BR>
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