Lehman Brothers Holdings Inc (LBHI) sued JPMorgan Chase & Co to recover tens of billions of dollars in “lost value,” accusing the bank of precipitating its downfall and preventing it from winding down in an orderly fashion.
JPMorgan, which was Lehman’s main short-term lender before its September 2008 bankruptcy, helped cause the failure by demanding US$8.6 billion of collateral as credit markets tightened during the financial crisis, Lehman said in a complaint filed yesterday in US Bankruptcy Court in New York.
“On the brink of LBHI’s bankruptcy, JPMorgan leveraged its life and death power as the brokerage firm’s primary clearing bank to force LBHI into a series of one-sided agreements and to siphon billions of dollars in critically needed assets,” Lehman said in the complaint.
Lehman, once the fourth-biggest investment bank, has said it may spend another five years selling assets to pay unsecured creditors as little as US$0.147 on the dollar. Any money recovered through lawsuits may increase the payout.
“The lawsuit is ill conceived, and the costly litigation will cause a further drain on the limited resources available to the Lehman bankruptcy estate,” said Joe Evangelisti, a JPMorgan spokesman.
The lawsuit follows a report by Lehman examiner Anton Valukas, who said in March that Lehman might have grounds for suing JPMorgan and other banks.
Lehman said JPMorgan’s top managers took advantage of privileged information they gained as Lehman’s primary clearing bank to “capitalize” on a Lehman bankruptcy.
JPMorgan chairman Jamie Dimon knew from meetings in Washington with US Federal Reserve Chairman Ben Bernanke and former US treasury secretary Henry Paulson that the US wouldn’t rescue Lehman and decided to “accelerate” the bank’s efforts to gain more collateral from Lehman, according to the complaint.
JPMorgan gained extra collateral from Lehman in part by threatening to stop providing clearing services that were the “lifeblood” of the Lehman brokerage and other affiliates, according to the lawsuit. Lehman said JPMorgan put a “financial gun” to its head and gave the already insolvent investment bank nothing in return for the collateral.
Lehman said in the complaint that from Sept. 9 to Sept. 11 in 2008 it posted US$3.57 billion in cash and money-market funds as collateral. On the night of Sept. 11, JP Morgan demanded an additional US$5 billion, which Lehman delivered the next night.
The total US$8.6 billion in collateral “rightfully” belongs to defunct Lehman and its creditors, Lehman said. In addition, it seeks unspecified damages, according to the complaint.
“As the examiner’s report makes clear, it was the ill-advised decisions of Lehman itself and its principals to take on perilous leverage and to double down on subprime mortgages and overpriced commercial real estate, and not any conduct by JPMorgan, that led to Lehman’s demise and the enormous losses to its various constituents,” Evangelisti said.
Lehman also has sued Barclays PLC, which bought its bankrupt brokerage, alleging the British bank made an US$11 billion “windfall” on the deal. A trial of that suit is due to continue next month in bankruptcy court.
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