Blavatnik Takes JPMorgan to Trial for Subprime LossChris Dolmetsch
JPMorgan Chase & Co. filled a fund started by billionaire Leonard Blavatnik with risky mortgage securities instead of the conservative investments it was told to make, lawyers for Blavatnik told a New York state judge today.
Blavatnik, 55, sued New York-based JPMorgan in New York state Supreme Court in June 2009, accusing the biggest U.S. bank by assets of putting more money into mortgage securities than his investment guidelines allowed.
The CMMF fund was started by Blavatnik’s Access Industries in 2006 as a “short-term, highly liquid and very conservative cash management account,” according to court filings. JPMorgan “stuffed” the account with risky mortgage securities, turning it into something it was never meant to be, said Richard I. Werder Jr., an attorney with Quinn Emanuel Urquhart & Sullivan LLP, which is representing the fund.
“This was not supposed to be a high-risk, swing-for-the-fences investment,” Werder told state Supreme Court Justice Melvin Schweitzer at the start of a non-jury trial over Blavatnik’s lawsuit that began in Manhattan today. “This was supposed to be the opposite: conservative and safe.”
JPMorgan should be held responsible for the loss, Blavatnik, who is ranked 47th in Bloomberg’s billionaires index with a net worth of $15.3 billion, said in his lawsuit, because it loaded his Access Industries fund with subprime and Alt-A mortgages while Chief Executive Officer Jamie Dimon was unloading such securities from the bank’s books.
“This was a sucker’s bet,” Werder said in a pretrial brief. “If it paid off, CMMF would merely recoup its principal. By making this massive bet -- which was completely unnecessary to achieve the account’s conservative objectives -- JPM breached the parties’ agreement, acted negligently and caused enormous and avoidable losses of approximately $100 million.”
The securities being challenged by CMMF had “extraordinary protection” against “all but the most catastrophic losses,” hadn’t defaulted while the bank managed the account and were AAA-rated when purchased, Lewis R. Clayton of Paul Weiss Rifkind Wharton & Garrison LLP, which is representing JPMorgan, told Schweitzer during opening arguments today. The securities had no downgrades until March 2008, Clayton said.
“The market believed these securities were safe,” Clayton said. “Their own investment advisers believed these investments were safe.”
JPMorgan has argued that CMMF rejected the “most conservative strategy” it was offered in favor of one that sought a higher return than a money-market fund, with higher risk and less liquidity, Clayton said in a pretrial memorandum.
The account performed well until the fall of 2007, when events in the mortgage markets and the economy “began to have a negative impact,” Clayton wrote in the memorandum.
JPMorgan Investment Management believed that prices for the asset-backed securities and collateralized mortgage obligations in the account were depressed because of “short-term liquidity problems, not because of a realistic risk of loss of principal,” and thought CMMF should hold the investments for the long term and not take losses at “artificially depressed prices,” according to Clayton’s memo.
“This view was shared by CMMF’s independent adviser, Nancy Zimmerman, a sophisticated financial professional who manages a multibillion-dollar hedge fund,” Clayton said in the pretrial memo. “CMMF also repeatedly made clear that it did not want to realize losses and objected vociferously when JPMIM sold one investment at a loss of approximately 5 percent.”
The account generated a net gain of almost $4 million until CMMF closed it in May 2008 and gave the securities to Zimmerman to manage, Clayton said in the memo.
The trial is set to last as long as two weeks. Blavatnik isn’t scheduled to testify, according to a list of witnesses.
The case is CMMF LLC v. J.P. Morgan Investment Management Inc., 601924-09, New York State Supreme Court (Manhattan).