The U.S. Commodity Futures Trading Commission settled charges against JPMorgan Chase Bank, N.A., and levied a US$20 million penalty against the bank, for its unlawful handling of Lehman Brothers, Inc.’s segregated funds before, and during, the financial crisis.
In addition to the civil monetary penalty, the CFTC’s 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 from the CFTC.
The regulator’s order finds that from November 2006 to September 2008, Lehman deposited its customers’ segregated funds with JPMorgan in large amounts, typically more than $250 million. JPM extended intra-day credit to Lehman to facilitate its proprietary trading, including repo transactions, based on the extent of Lehman’s positive “net free equity” at JPMorgan. However, JPMorgan included Lehman’s customer segregated funds in its calculation of the firm’s net free equity, even though these funds belonged to its customers, not to Lehman, it says.
The Commodity Exchange Act and CFTC regulations prohibit depository institutions from using or holding segregated funds that belong to a firm’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, by extending intra-day credit based in part on Lehman customers’ segregated funds. And, in September 2008, after Lehman filed for bankruptcy, it says JPMorgan improperly declined to release the segregated funds because Lehman no longer had positive net free equity. It only released the funds after being instructed to do by the CFTC.
“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.”
JPMorgan says that no customer funds were ever used to satisfy any Lehman debt to the firm, nor were any customer funds in these accounts lost. It also points out that the CFTC does not claim that JPMorgan intentionally violated the Commodity Exchange Act or CFTC regulations. The firm says it co-operated with the investigation and “is pleased to have resolved this matter”.