JPMorgan Chase & Co. opposed Lehman Brothers Holdings Inc.’s bid to pull Bruno Iksil, known as the “London Whale” trader, into an $8.6 billion fight between the biggest U.S. bank and the defunct investment bank.
Lehman asked a bankruptcy judge this month to let it try to force Iksil to testify on valuations of derivatives trades in 2008 that Lehman said spurred unnecessary margin calls and hastened its bankruptcy. Lehman also sought to be released from a confidentiality agreement with JPMorgan so it could file supporting documents for the request.
Lehman’s own employees have acknowledged Iksil wasn’t responsible for the derivatives trades, which were unrelated to Lehman’s lawsuit against its former lender, the bank told the judge in a federal court filing in Manhattan yesterday. For two years, Lehman has been “well aware” of Iksil’s lack of involvement in JPMorgan’s relationship with Lehman, it said.
“This application, therefore, should be seen for what it is: a blatant misuse of this court’s processes to harass JPMorgan with unnecessary and burdensome discovery and attempt to disparage JPMorgan with the irrelevant assertion that it did not act ‘altruistically’ in dealing with Lehman,” the bank said, asking the judge to turn down Lehman’s request. “Plaintiffs have repeatedly tried grandstanding tactics to add color to a lawsuit that is devoid of proof.”
JPMorgan, a key lender to Lehman during the 2008 credit crisis, said the derivatives margin that Lehman wanted to query Iksil about wasn’t related to the collateral at issue in the lawsuit. Lehman’s inquiry concerned fewer than a dozen derivatives trades, out of 70,000 such trades between the bank and its client, and would add nothing to the “millions of pages of documents and eighty depositions of current and former JPMorgan personnel” obtained by Lehman in the past two years, it said.
“That record shows that the collateral sought by JPMorgan was necessary to secure, among other things, tens of billions of dollars in credit that JPMorgan extended to Lehman on a daily basis up to, and even after, Lehman’s bankruptcy,” said the bank, which has repeatedly denied Lehman’s accusations.
JPMorgan in May disclosed billions of dollars in losses by London-based Iksil, who got his nickname because his positions were so big. Lehman, which sued JPMorgan for $8.6 billion in 2010, says Iksil’s mismarking of trades forced Lehman to post $273.3 million of collateral. JPMorgan later returned the money, acknowledging an error, Lehman said in court filings.
Lehman also is demanding more information about JPMorgan’s chief investment office, subject of a critical JPMorgan report that was publicized in the media. Lehman, which filed the biggest bankruptcy in U.S. history in September 2008, cited in court papers the derivatives-margin dispute and a hedging strategy at JPMorgan, which Lehman said was also related to the case.
“It is surprising that JPMorgan is trying to block Lehman’s efforts to get testimony from Mr. Iksil, who was a trader in the bank’s CIO office,” Andrew Rossman, a lawyer for the defunct firm at Quinn Emanuel Urquhart & Sullivan LLP, said in an e-mailed statement. “We believe that JPMorgan’s extraordinary effort to block that testimony is revealing.”
Iksil was the trader in two transactions involving disputed margin, Rossman said, citing an internal JPMorgan e-mail attached to his statement. The bank’s chief risk officer, John Hogan, told his counterpart at Lehman that the dispute would be cleaned up, Rossman said, citing another JPMorgan e-mail.
According to JPMorgan, neither Iksil nor the chief investment office had anything to do with the collateral at issue in the lawsuit. JPMorgan accused Lehman, which hasn’t mentioned Iksil or the chief investment office in any of its previous information requests, of exploiting “the CIO situation.”
“The CIO is part of the corporate sector at JPMorgan,” the bank said. “Its primary responsibility, working with JPMorgan’s treasury, is to manage certain of JPMorgan’s available cash in order to meet future liquidity needs and to provide a reasonable return. Plaintiffs have pointed to nothing that suggests that the CIO had responsibility in 2008 for managing JPMorgan’s exposure to Lehman.”
Lehman hasn’t alleged or cited proof that any member of the investment office was at key September 2008 meetings when the collateral disputed in the lawsuit was demanded, it said.
“Nor do plaintiffs cite any evidence that anyone from the CIO participated in the decision to request collateral from Lehman. Indeed, until the CIO became news, plaintiffs did not seek a single deposition from anyone in the CIO among the depositions they took of eighty JPMorgan witnesses.”
JPMorgan’s disclosures last year about investment office losses related to 2012 trades that were “wholly separate” from Lehman trades in 2008, JPMorgan said. Lehman can’t point to “any agreement or other understanding that macro hedges or other general hedging transactions would be considered in measuring Lehman’s obligations to JPMorgan, nor is there any legal support for imposing such a connection,” the bank said.
Lehman’s last attempt to exploit the news involved former U.S. Treasury Secretary Timothy Geithner, JPMorgan said. A year ago, Lehman sued Geithner to get him to testify in its legal fight with JPMorgan. He ultimately agreed to answer questions in writing.
Iksil was the JPMorgan contact for former Lehman trader Zahid Hassan on a disputed transaction in 2008, according to e-mails attached to Lehman’s court filings. Pressed by Lehman officer Lee Wigden to “continue to follow up with him,” Hassan said in an Aug. 28, 2008, e-mail that Iksil wasn’t “the one responsible” for the valuations.
On Sept. 10, 2008, five days before Lehman filed the biggest bankruptcy in U.S. history, Hassan said he had contacted Iksil again, and it seemed likely the disputed markings would “be sorted out.” A chat copied into the e-mail has Iksil saying, “I do not know. This is not me.”
After saying he would ask who could help Hassan with the issue, Iksil wrote, “We are checking. It is sorted out.” Then he referred Hassan to a colleague, Luis Buraya, who said, “It’s a fault on our side.” Buraya then gave Hassan a London phone number for Matthew Davies in JPMorgan’s chief investment office, “a contact at our side that is dealing with the issue,” Buraya wrote in the chat.
Lehman, which is gathering money to pay creditors an average of 18 cents on the dollar, said in filings that it realized Iksil could help it after JPMorgan disclosed “risk management failures,” including at the CIO. Iksil was “central” to the dispute with JPMorgan over valuing derivatives, New York-based Lehman said.
Lehman told the judge it wants to seek international judicial assistance to force Iksil, a French national, to answer questions, as he is unwilling to do so.
JPMorgan last month detailed lapses behind its biggest-ever trading loss in a 129-page report, saying employees were overwhelmed by the complexity of their bets, risk managers were ill-equipped and leaders including Chief Executive Officer Jamie Dimon weren’t aggressive enough in responding.
In the years before the trading losses, Dimon pushed the chief investment office to generate more profit by boosting the size and risk of its bets to include higher-yielding assets, Bloomberg News reported in April, citing former executives. The shift had made the unit an increasingly important customer to Wall Street’s trading desks, with bets that could move markets.
The loss at JPMorgan, considered one of the industry’s best-managed firms after remaining profitable during the credit crisis, has prompted lawsuits and probes in the U.S. and abroad. Last month, it led to regulatory sanctions, as banking watchdogs found internal-control “deficiencies.” The loss also pushed lawmakers to tighten trading curbs.
London traders initially tried to hide losses that ballooned beyond $6.2 billion in last year’s first nine months, JPMorgan said in its report. Dimon’s pay for 2012 was cut in half to $11.5 million following the debacle, which helped reduce shareholder value by as much as $51 billion.
The pay decision was announced as the firm reported a 53 percent jump in fourth-quarter profit to $5.69 billion, driven by earnings on mortgages.
Dimon ousted three London traders involved in the loss, shuffled senior managers and accepted resignations from executives. The report highlighted blunders tied to measuring risk.
Lehman filed for bankruptcy on Sept. 15, 2008, after piling on debt and making high-risk bets, according to an examiner’s report. Technically out of bankruptcy since March, the company has said it will continue to liquidate through about 2016.
Lehman hasn’t so far succeeded with its two biggest lawsuits against banks. It got none of the $11 billion it demanded from London-based Barclays Plc, which bought the defunct firm’s North American business in 2008. Lehman also failed last year to get a bankruptcy judge to restore key claims against JPMorgan.
Lehman’s lawsuit against JPMorgan alleges that the New York-based lender helped cause its collapse by demanding $8.6 billion in collateral. JPMorgan said a year ago it would give Lehman almost $700 million to settle part of the suit. It continues to fight most of Lehman’s claims.
The two parties also are fighting over a demand by JPMorgan for $6.3 billion it says it is owed.
The liquidation case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). Lehman’s lawsuit against JPMorgan is Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank NA, 10-03266, U.S. Bankruptcy Court, Southern District of New York (Manhattan).