JPMorgan Chase & Co., the largest U.S. bank, will pay $20 million to resolve a U.S. regulator’s claims that the firm mishandled customer funds from Lehman Brothers Holdings Inc. from 2006 to 2008.
JPMorgan, serving as Lehman’s main clearing bank, counted client money as belonging to the firm itself while extending loans that let Lehman bet on markets, the Commodity Futures Trading Commission said today in a statement. When Lehman filed for bankruptcy in September 2008, JPMorgan refused to release the money for two weeks until CFTC officials insisted, the watchdog said.
Collapses of Wall Street firms including MF Global Holdings Ltd. have spawned customer claims that their money was frozen or lost after companies improperly used their holdings. Lehman at times had more than $1 billion of clients’ funds deposited with JPMorgan, which improperly counted segregated customer funds in extending credit over a 22-month period, according to the CFTC.
“The laws applying to customer segregated accounts impose critical restrictions on how financial institutions can treat customer funds, and prohibit these institutions from standing in the way of immediate withdrawal,” CFTC Enforcement Director David Meister said in the agency’s statement. “These laws must be strictly observed at all times, whether the markets are calm or in crisis.”
JPMorgan settled claims that it violated commodities laws without admitting or denying wrongdoing, according to the CFTC.
The errors were unintentional, and JPMorgan didn’t use customer funds to meet any of Lehman’s obligations, the bank said in a statement today. The entire balance of one Lehman accounts was mistakenly factored into JPMorgan’s daily calculation of the broker-dealer’s assets in determining how much credit to extend, according to the statement.
“The size of this customer account was small relative to the overall relationship between JPMorgan and Lehman, as was any additional credit extended by JPMorgan to Lehman as a result of the account’s inclusion in the calculation of credit,” JPMorgan said.
Lehman, which filed the biggest bankruptcy in U.S. history with $613 billion in debt, said last month it was exiting court protection and will make a first payment to creditors April 17.
U.S. lawmakers questioned a JPMorgan executive last month about the bank’s handling of MF Global customer funds during a hearing on that New York broker’s Oct. 31 bankruptcy, which left a $1.6 billion shortfall in client money.
Diane Genova, a deputy general counsel for JPMorgan, told a House Financial Services subcommittee that the bank contacted Jon S. Corzine, MF Global’s former chairman and chief executive officer, to seek written confirmation that $175 million transferred to cover an overdraft in a London subsidiary’s account represented only the firm’s funds.
MF Global General Counsel Laurie Ferber told JPMorgan the transfer “represented a withdrawal of MF Global’s own funds held in a customer segregated account, and that we therefore did not need to be concerned,” Genova said. After rejecting the bank’s initial request as too broad, Ferber told JPMorgan representatives she would arrange to get a revised version of a confirmation letter signed, Genova told lawmakers.
MF Global never returned a signed letter, she said.
JPMorgan hasn’t been accused of any wrongdoing in the MF Global investigation.