Pensions Sue JP Morgan for Allegedly Profiting From Clients' Loss

(April 12, 2011) — New court documents show that JP Morgan, the nation’s second-largest bank by assets, is accused of breaching its fiduciary duty, profiting from a troubled investment vehicle while clients lost millions of dollars.

The pensions involved in the case include the board of trustees at the American Federation of Television and Radio Artists (AFTRA) Retirement Fund and the Imperial County Employees’ Retirement System, and the Investment Committee of the Manhattan and Bronx Surface Transit Operating Authority (MaBSTOA) Pension Plan.

The lawsuit, filed on behalf of the group of pension funds and obtained by The New York Times, accuses JP Morgan of earning fees and interest as well as hundreds of millions of dollars from collateral short-term loans totaling $1.9 billion. According to the documents, the bank breached its fiduciary duty and chose to ignore evidence that its clients were losing money in a downtrodden investment vehicle. Despite overwhelming concerns about the structured investment vehicle (SIV) called Signa, the bank allegedly still kept client money in the SIV while it collapsed and acted in its own financial interests, the suit noted.

The suit alleges that while essentially predicting the failure of Sigma, JP Morgan’s clients lost nearly the entirety of the $500 million the bank had invested on their behalf.

The lawsuit states:

“In clear breach of its fiduciary obligations, JP Morgan poached Sigma’s best assets for itself at favorable prices despite knowledge that its conduct would materially impair the financial interests of the Class when Sigma eventually collapsed. JP Morgan made no disclosure to the Class that would allow them to protect their interests. Nothing about its status as a multi-faceted financial institution allows JP Morgan to so blithely disregard the highest duties know not law. Accordingly, JP Morgan’s motion for summary judgement should be denied and plaintiffs’ cross-motion should be granted.” 

Similar lawsuits filed on behalf of shareholders — namely pension funds — against Wall Street giants failing to be fully transparent has been prevalent since the financial crisis, highlighting the failure of financial institutions to protect client interest. Lawsuits have been met with mixed success. Earlier this month, a US federal judge dismissed a lawsuit by a group of pension funds which accused Freddie Mac of materially misrepresenting its exposure to risky mortgage products, leading to investment losses. The pensions had asserted that Freddie Mac was not sufficiently transparent in its third-quarter 2007 disclosure of a $2 billion loss, which resulted in inflated share prices that eventually plummeted.

In March, US District Judge Paul Crotty named the Arkansas Teachers Retirement System, the West Virginia Investment Management Board, and the Plumbers and Pipefitters National Pension Group as co-lead plaintiffs in an investor lawsuit against Goldman Sachs Group. The pension schemes filed the suit in an effort to recover losses from the banking giant’s alleged misleading statements about Abacus, a credit derivative product based on mortgage-backed securities. Represented by the law firms Robbins Geller Rudman & Dowd LLP and Labaton Sucharow LLP, the funds reportedly suffered the most severe losses connected with the case of any of the proposed plaintiffs.

Last year, Goldman Sachs spent $500 million to settle civil fraud charges brought by the US Securities and Exchange Commission (SEC), which accused the banking giant of fraud in failing to disclose conflicts in mortgage securities that cost investors more than $1 billion and fueled the worst financial crisis since the Great Depression. While the housing market crumbed, the suit said, Goldman profited by betting against the mortgage investments it marketed to its customers.

Clarification: The JP Morgan lawsuit, filed in 2009 in the US District Court in New York, was brought to the spotlight this week by the New York Times, which reported on detailed documents uncovered in the suit.