Details of legal suit by billionaire against second biggest bank in US over $98 billion losses revealed

News - Banking

Written by Ray Clancy

Friday, 19 February 2010 09:22

A Billionaire is suing JP Morgan, the second biggest bank in the US, over losses of $98 million in a legal dispute that highlights a common difference between investors and their money managers over who is to blame when markets don’t perform.

Len Blavatnik claims that JPMorgan Chase, his bank for 15 years, lost a tenth of the $1 billion he had it manage and that was because it put twice as much money into risky mortgages as Blavatnik’s investment guidelines allowed while at the same time the bank’s chief executive was unloading such investments from its own books.

Blavatnik blames the bank for his losses, the bank blames the downturn in global markets and the economic crisis. The Ukrainian born billionaire said he made several attempts to seek redress without success and now papers have been lodged with the New York State Supreme Court.

The case, which hinges on the definition of an ‘asset-backed security’, has begun the information gathering, or discovery, phase. But the bank wants it thrown out and said it is a classic example of pleading with the benefit of 20/20 hindsight. It is ‘an improper attempt’ to ‘use the courts to collect reimbursement for investment losses that have resulted from an extraordinary and unprecedented economic crisis that no one could have anticipated,’ JPMorgan said in its court papers.

Blavatnik, now a US citizen, claims that JPMorgan loaded his Access Industries fund with subprime and so-called Alt-A mortgages at the same time its chief executive was ridding his bank of such exposure.

‘One of the issues that we will be exploring in discovery is whether JPM sold the Access fund subprime securities that it owned and thereby reduced its subprime exposure,’ said Richard Werder, a New York partner at Los Angeles based Quinn Emanuel Urquhart Oliver & Hedges, the firm Blavatnik hired to handle the case.

But JPMorgan said in court papers that the instruments it sold were different from those in the Access Industries account.

Other companies have accused the bank in lawsuits of stuffing portfolios with too much subprime-mortgage risk as it rid itself of the securities. They include bond insurer Ambac Financial Group and New Millennium Homes, a homebuilder in Calabasas, California. Last month JPMorgan won dismissal of a similar suit brought by reinsurer Assured Guaranty.

The investment objective for Blavatnik’s fixed income portfolio that JPMorgan began managing in May 2006 was ‘to provide a high level of current income consistent with low volatility of principal,’ according to the guidelines cited in his complaint.
Blavatnik had originally also claimed for negligence and breach of fiduciary duty but judges threw that out and limited the claim to the question of whether JPMorgan exceeded the guidelines’ 20% cap on mortgage-backed securities.

JPMorgan, which earned more than $1 million managing the account, says it did not. The guidelines listed asset-backed securities separately from mortgage-backed securities. The bank categorized certain instruments backed by real estate collateral, such as home equity loans or second lien mortgages, as asset-backed, according to the court papers.

Also the bank says that the ‘over-concentration’ of mortgage-backed securities happened because Blavatnik made ‘large cash withdrawals’ which brought the mortgage securities up to 20.8% of the portfolio from 13.2%.