WASHINGTON (MNI) – The Commodity Futures Trading Commission issued
the following Wednesday morning, confirming the report earlier in the
New York Times:
The U.S. Commodity Futures Trading Commission (CFTC) today filed
and simultaneously settled charges against JPMorgan Chase Bank, N.A.
(JPMorgan) for its unlawful handling of Lehman Brothers, Inc.’s (LBI)
customer segregated funds. The CFTC order imposes a $20 million civil
monetary penalty against JPMorgan. The order also requires JPMorgan to
implement undertakings to ensure the proper handling of customer
segregated funds in the future and to release customer funds upon notice
and instruction from the CFTC.
The CFTC order finds that from at least November 2006 to September
2008, JPMorgan was a depository institution serving LBI, a futures
commission merchant (FCM) registered with the CFTC. During this time,
LBI deposited its customers’ segregated funds with JPMorgan in large
amounts that varied in size, but almost always more than $250 million at
any one time. According to the order, during the same time period,
JPMorgan extended intra-day credit to LBI on a daily basis to facilitate
LBI’s proprietary transactions, including repurchase agreements, or
“repos.” JPMorgan would extend intra-day credit to LBI to the extent
that LBI’s “net free equity” at JPMorgan was positive. As of November
17, 2006, JPMorgan included LBI’s customer segregated funds in its
calculation of LBI’s net free equity, even though these funds belonged
to LBI’s customers, not to LBI, the order also finds.
The Commodity Exchange Act (CEA) and CFTC regulations prohibit
depository institutions, like JPMorgan, from using or holding segregated
funds that belong to an FCM’s customer as though they belong to anyone
other than that customer, and also prohibit the extension of credit
based on such funds to anyone other than that customer.
According to the order, JPMorgan violated these prohibitions in two
ways. First, as stated in the order, JPMorgan extended intra-day credit
to LBI for approximately 22 months based in part on LBI customers’
segregated funds because those funds were included in JPMorgan’s
determination of LBI’s net free equity. Second, on September 15, 2008,
Lehman Brothers Holding, Inc. filed for bankruptcy. Two days later, LBI
requested that JPMorgan release LBI’s customers’ segregated funds.
JPMorgan improperly declined the request based on JPMorgan’s
determination that LBI no longer had positive net free equity held at
JPMorgan. JPMorgan continued to refuse to release these funds for
approximately two weeks thereafter, only to release the funds after
being instructed by CFTC officials. The CFTC order does not find that
there were any customer losses.
“The laws applying to customer segregated accounts impose critical
restrictions on how financial institutions can treat customer funds, and
prohibit these institutions from standing in the way of immediate
withdrawal,” said David Meister, the Director of the CFTC’s Division of
Enforcement. “As should be crystal clear, these laws must be strictly
observed at all times, whether the markets are calm or in crisis.”
CFTC Division of Enforcement staff members responsible for this
matter are Joan M. Manley, A. Daniel Ullman II, and Alison B. Wilson.
Ananda K. Radhakrishnan and Robert B. Wasserman, of the CFTC’s Division
of Clearing and Risk, also contributed to this matter.
** MNI Washington Bureau: 202-371-2121 **