Then, at the height of the financial crisis, JPMorgan refused to release the
customer funds for about two weeks, until regulators ordered it to do so,
The charges were spelled out in an enforcement action against JPMorgan by the
Commodity Futures Trading Commission (CFTC).
Without admitting or denying wrongdoing, JPMorgan agreed to pay $20 million
to settle the civil case.
The matter adds another dimension of alleged lawbreaking to the history of Lehman’s downfall. It was also another vivid illustration
that, even in highly regulated modern financial firms, basic controls can break
Last fall, the big brokerage firm MF Global collapsed with as much as $1.6 billion of
customer funds missing and unaccounted for. There, too, it appears that
clients’ money was treated as if it belonged to the firm.
The customer deposits at issue in the Lehman matter, which totaled from about $250 million to
more than $1 billion at any one time, were supposed to have been held for
customers who were using Lehman as a broker for futures and options trades.
Federal law declares that such funds should not be commingled with those of
the firm, the commission said.
“The laws . . . impose critical restrictions on how financial institutions
can treat customer funds,” CFTC enforcement director David Meister said in a
statement. “As should be crystal clear, these laws must be strictly observed at
all times, whether the markets are calm or in crisis.”
JPMorgan refused to release the funds in September 2008, partly because they
were tied to Lehman’s borrowing from JPMorgan, the CFTC said. JPMorgan also
cited “its inability to verify” that the funds belonged to customers, the
In a statement Wednesday, JPMorgan said it “mistakenly factored the balance .
. . into a daily calculation of [Lehman Brothers Inc.] assets to determine the
amount of credit the firm was willing to extend to [Lehman Brothers Inc.].”
No customer funds were lost, and the commission did not accuse JPMorgan of
intentional wrongdoing, JPMorgan said.
Lehman imploded largely under the weight of its borrowing. The New York
attorney general’s office in 2010 charged that Lehman’s audit firm helped it
engage in “a massive accounting fraud” that concealed the extent to which the
firm was leveraged with debt.
Wednesday’s charges involved loans that JPMorgan made to Lehman on an
intraday basis — in installments of no more than a day. The amount JPMorgan
would lend was pegged to the amount of cash and securities Lehman had on deposit
Lehman began counting customer assets toward that total in 2006, and JPMorgan
“acceded” to the practice, the commission said.
JPMorgan said the amount by which the alleged wrongdoing increased Lehman’s
borrowing was relatively small. According to the CFTC charging document, over a
period of almost two years, it boosted Lehman’s borrowing under the intraday
program by as much as 5 percent at any point in time.
The $20 million penalty is little more than a pinprick for a firm of
JPMorgan’s size. For 2011, it reported a profit of $19 billion.