Lehman Bankruptcy Follows JP Morgan
Regulators are taking JPMorgan Chase to task for how it handled segregated funds of customers at Lehman Brothers Holdings. JP Morgan was a key lender to Lehman before it filed for the biggest bankruptcy in United States history on Sept. 15, 2008.
On April 4, 2012, the Commodity Futures Trading Commission (CFTC) filed a civil case against JPMorgan, making it the first federal enforcement case tied to Lehman’s demise. As reported April 4 by the New York Times, JP Morgan agreed to pay a fine of some $20 million to settle the case.
The trading commission accused JPMorgan of unlawfully handling customer segregated funds and overextending credit to Lehman for roughly two years leading up to its bankruptcy. JPMorgan extended the credit using an inaccurate evaluation of Lehman’s worth, counting money of Lehman’s customers as belonging to the firm. Under federal law, firms are not allowed to use customer money to secure or extend credit.
The theme of customer money also is at the center of the MF Global bankruptcy. MF Global Holdings Ltd., the broker’s parent company, filed for bankruptcy protection on Oct. 31, 2011. Later, it was revealed that as much as $1.6 billion was missing in client money and that the company’s leverage ratio was 38-to-1.
JPMorgan also was involved in the final days of MF Global. Unlike MF Global, however, customer money never went missing from Lehman Brothers.
In the case of MF Global, JPMorgan received money belonging to the brokerage firm’s customers. The missing customer money is now the subject of a federal investigation.