Lawsuit: JPMorgan Chase Profited $1.9 Billion from Sigma Collapse While Bank’s Clients Wiped Out
Even though top executives at Wall Street giant JPMorgan Chase knew the bank’s stake in investment firm Sigma was a high-risk proposition, they chose not to sell $500 million in client assets invested in the troubled company. After Sigma collapsed, JPMorgan profited to the tune of $1.9 billion while its clients lost 94% of their investment in the firm.
The New York Times reports that new documents released last month as part of a lawsuit by JPMorgan clients against the bank reveal that warnings about Sigma went all the way to the top. CEO Jamie Dimon not only knew about the likelihood of Sigma’s demise, he also allowed JPMorgan to lend the failing company billions of dollars knowing that when it collapsed his bank would be able to acquire its best assets at a deep discount.
The suit, which was filed in the Federal District Court for the Southern District in New York, dates back to the summer of 2007. That’s when JPMorgan invested half a billion dollars from pension funds and client investments into notes issued by Sigma. Potential return on investment was dependent upon Sigma’s performance. But JPMorgan’s investments were handled by the bank’s securities lending unit, which meant that bankers would make money if their Sigma bet panned out. But if the investment was a flop, the bankers wouldn’t share in the losses.
An internal e-mail between top JPMorgan executives reminds them that the bank’s priority was the protection of its own interests vis-a-vis Sigma, without consideration for their clients’ losses. The bank’s chief risk officer, John Hogan, authored a similar statement.
By February 2008, 7 months before Sigma’s collapse, it was evident to many top JPMorgan executives that Sigma would not survive for very much longer. Mark Crawley, of JPMorgan’s London office, wrote that it was “unlikely” Sigma would survive. With JPMorgan considering lending the failing firm billions, Crawley warned that the bank’s reputation could take a serious hit if it went ahead with the loan. His warning went unheeded.
According to the New York Times, Crawley e-mailed chief credit officer Andrew Cox, telling him there were “very big moneymaking opportunities” in Sigma since the firm had high-quality assets that would become JPMorgan’s in the event of a collapse.
In September 2008, Sigma did indeed collapse. By that time, JPMorgan had lent it $8.4 billion and held $9.3 billion in assets obtained as a security deposit. Many of those assets appreciated in value and when added to the $228 million in fees charged to Sigma to secure the loans, JPMorgan’s total gain was around $1.9 billion.
Meanwhile, the pension funds whose money JPMorgan invested in Sigma lost almost everything, with $500 million now worth 6 cents on the dollar.
More than anything, the lawsuit against JPMorgan Chase is about a trusted company breaking its duty to its clients. Bank executives played fast and loose with investors’ funds, knowing full well that they would profit handsomely if their bets paid out, but not lose a cent– or even make money, as they did– if Sigma failed.
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