JPMorgan Chase & Co. said Berlin’s public transport provider only has itself to blame for signing an “unfortunate” derivatives contract that led to $200 million in losses.
JPMorgan’s lawyer, Laurence Rabinowitz, told a London court on the first day of a trial that the timing of Berliner Verkehrsbetriebe’s 2007 credit-default swap “could hardly have been worse” because it coincided with the start of the global financial crisis.
“Rather than simply accepting that it had been unfortunate,” Rabinowitz said today that BVG “cast around for someone other than itself to blame.” JPMorgan sued the transport organization to recover $204 million plus interest it says it is owed.
BVG, which has run the German capital’s trains and buses for more than 80 years, argues it wasn’t sophisticated enough to understand the transaction and was misled by JPMorgan and the bank’s law firm, Clifford Chance LLP. The owner of OK! Magazine, dentists and elderly care homes have sued lenders over the sale of derivatives they say they didn’t need or fully comprehend.
Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment. BVG didn’t immediately respond to e-mails seeking comment. Anna Ward, a spokeswoman for London-based Clifford Chance, said the law firm should never have been sued.
“We believe the claims against us are misconceived and entirely without merit and we will continue to defend our position robustly,” Ward said in an e-mailed statement.
The chance of any defaults in the underlying portfolio for the swap were 0.19 percent when it was signed, Rabinowitz said. One of the companies linked to the transaction was Lehman Brothers Holdings Inc., which collapsed in 2008, sparking turmoil in the markets.
“Taking on a small risk, even vanishingly small, isn’t the same thing as taking on no risk at all,” Rabinowitz said.
Credit-default swaps are agreements for one party to pay another if a target goes bankrupt or fails to pay its debts. The product can be used as a type of insurance, or to speculate on the credit-worthiness of companies or assets.
JPMorgan staff “shut their eyes” to the fact that BVG had misunderstood the “complex credit derivative” it was signing, the transport body said in legal documents. Bank employees knew BVG had no experience in this type of transaction, and gave a misleading presentation about its risks, according to the documents.
“BVG was badly let down by Clifford Chance,” which had a conflict of interest because it simultaneously advised both JPMorgan and the BVG, the German company said in the documents. The law firm should have turned down the work, or ceased to act, because of the risk of a conflict of interest, BVG said.
JPMorgan fought for three years to have the case heard in the U.K., with the European Court of Justice ruling in its favor in 2011. BVG had sought a trial in Germany.
The trial is scheduled to last for 10 weeks.
The case is: JPMorgan Chase Bank & Anr v Berliner Verkehrsbetriebe, High Court of Justice, Queen’s Bench Division Commercial Court: 08-1052