Nov. 14 (Bloomberg) -- Amaranth Advisors LLC, the hedge- fund firm that failed last year after losing $6.5 billion, sued JPMorgan Chase & Co., accusing the bank of sabotaging its efforts to stave off collapse.

Amaranth lost 65 percent of its assets in September 2006 because of a wrong-way wager on natural gas. JPMorgan, the third-largest U.S. bank, and hedge-fund manager Citadel Investment Group LLC later took over the Greenwich, Connecticut- based firm's energy trades. Amaranth returned cash to investors this year.

In a letter yesterday to investors, founder Nicholas Maounis said $2.5 billion of the firm's losses came from a cash concession made to JPMorgan for taking over the energy derivatives portfolio after negotiations with other parties failed. He said the bank interfered with his attempts to strike a better deal with Goldman Sachs Group Inc. or Citadel.

``JPMorgan used its position as the fund's clearing broker to prevent the fund from executing a more favorable transaction, to extract that massive concession payment and inflict other damages on the fund,'' Maounis, 44, wrote in the letter. He said that, without JPMorgan's actions, ``the losses, though significant, would have been survivable and far less dramatic.''

JPMorgan said in an emailed statement that its conduct was ``entirely appropriate and consistent with its rights and obligations as Amaranth's future commissions merchant.''

Goldman Agreement

A summons filed yesterday in New York State Supreme Court says Maounis approached Goldman Sachs on Sept. 15 to assume its money-losing positions because the fund's losses were mounting and its margin requirements had topped $3 billion. The New York- based investment bank agreed to take the trades for a $1.85 billion concession, the suit says.

The suit says JPMorgan, Amaranth's broker, ``refused to execute the order for the Goldman Sachs trade,'' causing Goldman to walk away from the deal. Meanwhile, the fund continued to lose hundreds of millions of dollars as natural-gas prices continued to fall, according to the suit.

Charles Winkler, Amaranth's chief operating officer, then called Kenneth Griffin, founder of Citadel, a Chicago-based hedge-fund company where Winkler used to work, the suit says. Griffin had sent him an email earlier in the day, asking if the firm needed a ``liquidity line.''

Citadel Terms

Citadel initially agreed to take over the energy portfolio for a $1.85 billion concession, according to court documents. Then Griffin spoke with Steve Black and Bill Winters, co-chief executive officers at JPMorgan's investment bank. The suit alleges that Black and Winters lied to Griffin, saying ``Amaranth is not as solvent as they are telling you they are.'' Griffin also walked away from the transaction.

On Sept. 19, JPMorgan said it would take over the energy trades, and would then sell them to Citadel. On Sept. 29, Citadel bought the positions from JPMorgan for $725 million.

Amaranth and the fund, Amaranth LLC, are seeking damages of more than $1 billion.

``Even Wall Street banks trying to make big profits have to obey the law,'' said Phil Beck, a partner at Bartlit Beck Herman Palenchar & Scott, the Chicago-based law firm representing Amaranth. ``This lawsuit is about a bank that went too far.''

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net

Last Updated: November 14, 2007 17:34 EST