JP Morgan Will Pay $150 Million Over Risk Disclosures

Retirement plans across the U.S. argued they were misled about the riskiness of funds exposed to the firm’s much-maligned “London Whale” trading losses in 2012. 

It’s been several years since newspaper headlines railed again the “London Whale” trading difficulties at J.P. Morgan, but at least one related securities lawsuit involving retirement plans is still unfolding in the federal courts.

Documents filed over the past several weeks with the U.S. District Court for the Southern District of New York show J.P. Morgan Chase and Co. has tentatively agreed to pay $150 million to settle claims in a securities lawsuit brought by retirement plans who shared in billions of unexpected losses.

By way of background, case documents explain the so-called “London Whale” is a former J.P. Morgan trader named Bruno Iksil, who turned out to be an influential trader at the bank making large and complex bets on U.S. corporate bonds. According to plaintiffs, Iksil eventually made errors and serious miscalculations in certain very large trades executed through exotic derivative products. Making matters worse, risk managers at the firm apparently bent the rules for investing as they were explained to clients with a lot of money at stake, allowing the risk-taking to grow. By the time others at the bank noticed and took corrective action the losses had already climbed to the billions.

More than a few pieces of litigation arose from the matter, including the case at hand, brought by a collective of mainly public retirement plans, including the Ohio Public Employees Retirement System (OPERS), the Arkansas Teacher Retirement System, and several public retirement plans in the State of Oregon. The plans all suffered unexpected investment losses and claim J.P. Morgan violated federal securities laws by making materially false and misleading statements concerning the risks and losses arising from “secret proprietary trading activities.”

A hearing on preliminary approval of the parties’ proposed $150 million class action settlement is scheduled for January 19. According to the plaintiffs’ written agreement to the settlement terms, the parties did not agree on the hard-won terms “until after the court’s [previous] decision on defendants’ motion to dismiss the lead plaintiffs’ claims; the completion of substantial discovery, including depositions; the court’s favorable decision to certify the class; and a lengthy mediation spanning several months.” The settlement, if approved by the district court, would “resolve and release the class’s claims against all defendants in this action in exchange for the immediate payment of $150,000,000, in cash, by defendants.”

NEXT: Settlement details hinge on risk monitoring 

Case documents contain some interesting details about the risk management processes of the firm and how plaintiffs felt they were mistreated by the bank, especially its representations of its risk management processes.

According to the plaintiffs, the firm’s “principal risk management unit,” was “responsible for making investments to hedge the structural risks of [the firm’s] balance sheet on a consolidated basis … in other words, to decrease the bank’s risks by hedging them.” The lead plaintiffs instead alleged that, “contrary to this public portrayal,” the most prominent activity carried out by the risk mitigation unit tasked with protecting their investments “was proprietary trading in an enormous portfolio of complex credit derivatives known as the Synthetic Credit Portfolio (SCP), which reflected over $150 billion in notional value by the time the class period began.”

Plaintiffs alleged that the size of the SCP’s positions “greatly increased during the first three months of 2012, triggering risk limit breaches that J.P. Morgan told investors it used to monitor and control risk, including the ‘value at risk’ or ‘VaR’ metric, which is a measure of how much money the company could lose on a given day.” Yet, rather than require the London Whale trader to reduce risky positions—which would have resulted in substantial short-term losses but mitigated the prospective overall risk of the portfolio—the bank “approved a temporary increase to its firm-wide VaR limit, and then authorized a change to the VaR model that instantaneously cut the VaR in half.”

Further, plaintiffs alleged that, beginning around February 2012, “hedge funds such as Saba Capital recognized that certain credit derivative index markets were being distorted by a single trader taking on outsized positions (i.e., the London Whale), and that by taking opposing positions they could reap profits when that trader was eventually forced to exit due to liquidity constraints and mounting mark-to-market losses.”

Regarding how the settlement money will be divided up, the proposed plan of allocation “is similar to plans of allocation that have been approved in numerous securities class actions asserting claims under Section 10(b) and Rule 10b-5 of the Exchange Act,” plaintiffs say. “The plan allocates the net settlement fund based on an estimate (determined by co-lead counsel and their experts) of the amounts by which the market prices of J.P. Morgan common stock trading on the New York Stock Exchange were artificially inflated at various points during the class period, and takes into consideration when an authorized claimant purchased and/or acquired J.P. Morgan common stock and when those shares were sold.”

Under the plan, no class member will receive a payment unless they held J.P. Morgan common stock through at least one alleged corrective disclosure date and the amount of their payment calculates to $10 or more.

Full details of the settlement of agreement are here.