Lehman Sues JPMorgan for Billions of Dollars in ‘Lost Value’

 Lehman Brothers sues JPMorgan for billions over collapse

[JURIST] Lehman Brothers Holdings [corporate website] on Wednesday filed suit [complaint, PDF] against JPMorgan Chase & Co. [corporate website] for allegedly "siphoning" off billions of dollars in "critically-needed" assets days before the investment bank filed for a record-breaking bankruptcy. JPMorgan was Lehman's main short-term lender before its collapse and acted acted as a middleman between Lehman and its investors. In the complaint, Lehman accused JPMorgan executives of using inside knowledge to take advantage of Lehman during its financial downfall and pressured the brokerage firm to turn over $8.6 billion in collateral in September 2008. The last-minute transactions allegedly accelerated Lehman's free fall into bankruptcy, costing the investment bank tens of billions of dollars in "lost value." The complaint, which was filed in the US Bankruptcy Court for the Southern District of New York [official website] in Manhattan, is seeking monetary relief for JPMorgan's contribution in Lehman's downfall as a result of its wrongful conduct:

JPMorgan's insistence on the new agreements in August and September 2008, its unjustified demands for billions in additional collateral, and its refusal to return that collateral in the critical days before [Lehman's] bankruptcy filing, severely constrained [Lehman's] liquidity and impeded its ability to pursue and implement alternatives and initiatives that would have resulted in the preservation of billions in value. Instead, [Lehman's] liquidity constraints compelled an exigent chapter 11 filing that has resulted in tens of billions of dollars in additional lost value to the [Lehman] estate and its creditors. ... It is now too late to undo all the harm caused by the [Lehman] bankruptcy. It is not too late, however, to return to [Lehman's] estate and its creditors the billions of dollars of [Lehman] assets that JPMorgan illegally converted and continues to hold, and to compensate [Lehman] for all the damages that flow directly from JPMorgan's misconduct. This lawsuit seeks to return that value to the [Lehman] estate and to restore all of the creditors to the position they would have occupied but for JPMorgan's wrongful conduct.

May 27 (Bloomberg) -- Lehman Brothers Holdings Inc. 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 $8.6 billion of collateral as credit markets tightened during the financial crisis, Lehman said in a complaint filed yesterday in U.S. 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 14.7 cents 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.

Dimon Meetings

JPMorgan Chairman Jamie Dimon knew from meetings in Washington with Federal Reserve Chairman Ben Bernanke and former U.S. Treasury Secretary Henry Paulson that the U.S. 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 $3.57 billion in cash and money-market funds as collateral. On the night of Sept. 11, JP Morgan demanded an additional $5 billion, which Lehman delivered the next night.

Total Collateral

The total $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 $11 billion “windfall” on the deal. A trial of that suit is due to continue next month in bankruptcy court.

Lehman filed the biggest bankruptcy in U.S. history with assets of $639 billion. It has paid its lawyers and managers $794 million in 19 months, according to a regulatory filing.

Creditors include Goldman Sachs Group Inc., UBS AG, the New York Giants and Abu Dhabi Investment Authority as well as individuals who hold Lehman bonds.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

By Linda Sandler and David McLaughlin --Editors: John Pickering, Michael Hytha.