Administration January 29, 2009

JP Morgan Hit with SecLending Lawsuit

January 29, 2009 (PLANSPONSOR.com) - A union pension fund has sued JPMorgan Chase over allegations it breached its fiduciary duties to its pension clients investing in the financial services company's securities lending program.
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The Board of Trustees of the American Federation of Television and Radio Artists (AFTRA) Retirement Fund alleged in the suit, which seeks class-action status, that the fiduciary breaches caused billions of dollars in pension investment losses. The losses were related to JPMorgan’s investments in medium-term notes (MTN) issued by Sigma Finance Inc.

According to the complaint filed in the U.S. District Court for the Southern District of New York, numerous pension plans, including the AFTRA fund, entered securities lending agreements with JPMorgan after the company touted its securities lending program as a means to “obtain an attractive return while minimizing risk.”

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Sigma Finance is organized to issue debt securities for its Cayman Islands parent company. The debt securities at issue were secured only by a “floating lien” on the assets of Sigma Finance, which were subject to subordination to the lien interests of Sigma’s other creditors.

Analyst Warnings

The lawsuit said financial analysts warned that structured investment vehicles (SIVs) like Sigma Finance lacked liquidity in the credit market and that sharp declines in the market value of assets backing many SIVs threatened their viability, but JPMorgan “buried its head in the sand and refused to heed the warning signs.”

Analyst predictions later proved true when Sigma Financial’s creditors seized over $25 billion of its approximately $27 billion of assets in late September and early October 2008, leaving Sigma Financial about $2 billion as security for approximately $6.2 billion of outstanding MTNs and other secured debt, the lawsuit alleged. Sigma Financial was placed into receivership in early October 2008.

While JPMorgan was investing the plans’ money in Sigma Financial MTNs, it also earned substantial fees and interest through providing short-term repurchase (repo) financing for Sigma Finance, according to the complaint.

The suit charged JPMorgan’s actions represented Employee Retirement Income Security Act (ERISA) fiduciary breaches because it should have known the Sigma Financial investments were imprudent and because it had a conflict of interest through its repo financial arrangement with Sigma.

The suit is Board of Trustees of the AFTRA Retirement Fund v. JPMorgan Chase Bank N.A., S.D.N.Y., No. 1:09-cv-00686-SAS.

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