JPMorgan Turned CIO Into Prop-Trading Desk, Pensions Say

JPMorgan Chase & Co. (JPM) turned its chief investment office into a “secret hedge fund” that caused more than $6.2 billion in losses, pension funds said in a revised complaint in their lawsuit against the bank.

JPMorgan represented that the office’s primary role was managing risk when in fact it was engaging in trades to generate profit for the New York-based bank, the funds said in an amended complaint filed yesterday in Manhattan federal court.

JPMorgan Chief Executive Officer Jamie Dimon “secretly transformed the CIO from a risk management unit into a proprietary trading desk whose principal purpose was to engage in speculative, high-risk bets designed to generate profits,” the plaintiffs said.

U.S. District Judge George Daniels ruled in August that lawsuits against JPMorgan, the biggest U.S. bank by assets, should be consolidated into a class action. The pension funds allege that they incurred losses in their holdings because of trades by the chief investment office and Bruno Iksil, known as “the London Whale.”

The lead plaintiffs include the Arkansas Teacher Retirement System, the Ohio Public Employees Retirement System, and the state of Oregon. They claim JPMorgan’s statements about the CIO and the bank’s risk-management practices misled investors.

Bank Shareholders

The complaint was filed on behalf of JPMorgan shareholders who bought stock between Feb. 24, 2010, when the company filed its 2009 earnings report with regulators, and May 21, 2012, when the bank announced it was halting a $15 billion share buyback program until it could control the losses.

Joe Evangelisti, a JPMorgan spokesman, declined to comment on the complaint.

The plaintiffs claim that bank executives decided against establishing a so-called liquidity reserve for Iksil’s portfolio in 2010 -- despite an internal report that said the bank needed $2 billion to $4 billion in reserves in case markets became illiquid and the company was forced to sell his positions.

“Because the company never took the liquidity reserve it was required to have taken, the company’s net income was overstated by at least $2 billion each quarter during the class period, rendering JPMorgan’s financial statements materially false,” according to the complaint.

In addition to Dimon, 56, the investors are suing Michael Cavanagh, co-CEO of the corporate and investment bank; Chief Financial Officer Douglas Braunstein; and Ina Drew, who was the bank’s chief investment officer.

“JPMorgan senior management made a conscious, strategic decision to use the CIO for proprietary trading in pursuit of short-term profits,” the plaintiffs said.

The case is In re JPMorgan Chase & Co. Securities Litigation, 12-cv-3852, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Dawn Kopecki in New York at dkopecki@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; David Scheer at dscheer@bloomberg.net

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