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Retirement Fund Securities Lending Program Actions

Board of Trustees of the AFTRA Retirement Fund v. JPMorgan Chase Bank, N.A., 09-cv-686 (S.D.N.Y.) Manhattan

Summary:

Lead action for three related & consolidated cases also including: Board of Trustees of the Imperial County Employees’ Retirement System v. JPMorgan Chase Bank, N.A. , 09-cv-3020 (S.D.N.Y.); Investment Committee of the Manhattan and Bronx Surface Transit Operating Authority Pension Plan v. JPMorgan Chase Bank N.A., 1:09-cv-04408 (S.D.N.Y.) “ Class Action Complaint (“Complaint”) on behalf of … all plans subject to … ERISA, who were participants in Defendant’s securities lending program and, through one or more of the collective investments vehicles managed by Defendant or its affiliates, incurred losses relating to investments in medium-term notes of Sigma Finance, Inc. …” “[Under] Securities Lending Agreements, Defendant loaned securities owned by Class Members to third-party borrowers in return for cash collateral; defendant then invested, at its sole discretion, the cash collateral in an effort to earn an investment return on the cash collateral in excess of the rebate paid to the third-party borrowers….Despite these objectives and duties, Defendant invested and lost a substantial portion of the cash collateral provided to Class Members in medium-term notes (“MTNs”) issued by Sigma Finance, Inc. (“SFI”)… Shortly after Defendant purchased a substantial amount of Sigma MTNs using the cash collateral held by Class Members, analysts …warned that the lack of liquidity in the credit market and sharp declines in the market value of assets backing many SIVs threatened their viability. By no later than December 2007, analysts predicted that Sigma would not be able to repay the MTNs Defendant purchased with Class Members’ collateral upon maturity. However, Defendant wholly ignored these reports and continued to hold these rapidly declining investments. “In late September 2008, the analyst predictions proved true. Sigma’s creditors seized over $25 billion of its approximately $27 billion of assets, leaving approximately $1.9 billion as security for approximately $6.2 billion of outstanding MTNs and other secured debt. By October 6, 2008, Sigma was in receivership…” “…While JPMorgan was investing the AFTRA Plan’s money in Sigma MTNs, JPMorgan was also earning substantial fees and interest through providing short term repurchase ("repo") financing directly to Sigma…in direct conflict with its fiduciary responsibility to the AFTRA Plan and, as a result of its direct relationship, JPMorgan was clearly in a position to know of Sigma’s problems.” “In addition, money market funds managed by JPMorgan also held Sigma MTNs. Rather than protect the assets of the AFTRA Plan and the Class, JPMorgan supported Sigma with repo financing, then pulled the plug after its own money market mutual funds received their final payments on their Sigma MTN holdings.” “Specifically, in October 2008, JPMorgan issued a notice of default for the credit it provided to Sigma and moved to seize the collateral provided in exchange for its repo funding. JPMorgan’s move was followed by Sigma’s other lenders. The banks’ seizure of Sigma’s assets forced Sigma’s collapse. Thus, at the same time that JPMorgan sought to safeguard its own financial interest by seizing Sigma’s collateral –precipitating Sigma’s collapse – JPMorgan continued to invest the AFTRA Plan’s assets in Sigma. Plaintiff seeks losses to these plans … [plus] injunctive relief and, as available under applicable law, constructive trust, restitution, equitable tracing, and other monetary relief.”

Status:

Lead case originally filed 23 January 2009. As of 3 March 2011 JPM has moved for partial summary judgment seeking to dismiss claims for breach of fiduciary duty based on its issuance of repo financing to Sigma. JPM asserts that its commercial and investment banking operations are separate and that there is no basis for a breach of duty claim based on the commercial banking operations it undertook, which furthermore plaintiffs have not shown caused their injury.

News:

  1. http://www.nytimes.com/2011/04/11/business/economy/11bank.html?_r=1
  2. http://www.jpmorgansecuritieslendinglitigation.com/

Documents:

  1. http://graphics8.nytimes.com/packages/pdf/business/0408PlaintiffsOmnibusBrief.pdf
  2. http://jpmorgan-watch.com/files/36_defendant_jpms_brief_in_support_of_motion_for_partial_summary_judgment.pdf
  3. http://jpmorgan-watch.com/files/35_aftra_complaint.pdf