JPMorgan Chase & Co.’s Bear Stearns Asset Management persuaded a judge to dismiss a lawsuit by Bank of America Corp. over a collateralized debt obligation transaction that resulted in billions of dollars in losses.
U.S. District Judge Alison Nathan in Manhattan yesterday granted JPMorgan’s request for summary judgment, or a ruling before trial, and dismissed all of Bank of America’s claims, including an allegation the defendants breached their fiduciary duty and a fraud claim tied to the CDO deal.
Bank of America sued Bear Stearns Asset Management and hedge-fund managers Ralph Cioffi and Matt Tannin in 2008, saying it suffered billions of dollars in losses after they sought capital to prop up failing funds in 2007.
Mortgage-backed assets, mostly owned by the Bear Stearns hedge funds, were used to back the sale of securities in the deal structured by Bank of America, according to the complaint. Hedge fund losses hidden from the bank led to the funds’ collapse and caused an “enormous decline” in the securities and the assets backing them, the bank alleged.
The defendants “were desperate to secure liquidity to prop up the failing hedge funds,” the plaintiffs alleged. They misled the bank into structuring, marketing and completing the transaction, according to the complaint.
Bank of America, based in Charlotte, North Carolina, claimed the defendants compounded the damages by luring the bank into providing an additional $1 billion. New York-based JPMorgan bought Bear Stearns in 2008.
Bill Halldin, a spokesman for Bank of America, declined to comment on the judge’s ruling. Joe Evangelisti, a JPMorgan spokesman, said the company was pleased with the court's decision.
Nathan dismissed Bear Stearns’s counterclaim, saying the matter was moot. Cioffi and Tannin were acquitted after a 2009 federal trial of charges they misled investors in the funds.
A CDO is a type of security backed by a pool of securities that themselves are usually backed by other assets, often mortgages. In Bank of America’s “CDO-squared” transaction, a special purpose entity acquired a portfolio of mortgage-related securities, including CDOs from the Bear Stearns hedge funds, and then issued securities backed by the portfolio.
The case is Bank of America v. Bear Stearns, 08-cv-09265, U.S. District Court, Southern District of New York (Manhattan).