Lehman: JPMorgan accelerated freefall, owes billions in converted cash

By Caroline Salls

Pittsburgh, May 26 - Lehman Brothers Holdings Inc. filed a lawsuit Wednesday against JPMorgan Chase Bank, NA, alleging that the bank "stripped a faltering Lehman Brothers of desperately needed cash," according to a filing with the U.S. Bankruptcy Court for the Southern District of New York.

"On the brink of LBHI's bankruptcy, JPMorgan leveraged its life and death power as the brokerage firm's primary clearing bank to force LBHI into a series of one-sided agreements and to siphon billions of dollars in critically-needed assets," Lehman said in the complaint.

Lehman said JPMorgan used these tactics to "leapfrog JPMorgan over other creditors by putting itself in the position of an overcollateralized creditor, not just for clearing obligations, but for any and all possible obligations of LBHI or any of its subsidiaries that JPMorgan believed could result from an LBHI bankruptcy."

According to the lawsuit, JPMorgan's actions, "taken with the benefit of unparalleled inside knowledge," were devastating to Lehman.

"JPMorgan not only took billions of dollars more than it needed from LBHI, but it also accelerated LBHI's freefall into bankruptcy by denying it an opportunity for a more orderly wind-down, costing the LBHI debtors tens of billions of dollars in lost value," Lehman said in the suit.

To accomplish its goal, Lehman said JPMorgan allegedly threatened to stop providing Lehman's subsidiaries with "the essential clearing services that were the lifeblood of Lehman's broker-dealer business."

As a result, Lehman said the bank was able to reach "extraordinarily one-sided agreements" with the company and use them to extract billions of dollars in collateral from Lehman shortly before its bankruptcy.

Lehman alleged that JPMorgan used this collateral to "secure billions of dollars of grossly exaggerated exposures" that it now claims resulted from Lehman's bankruptcy filing.

"JPMorgan did this at a time when LBHI, and many of its subsidiaries, were insolvent, and JPMorgan provided no consideration in return, let alone anything resembling reasonably equivalent value," Lehman said in the complaint.

"Those billions of dollars in collateral rightfully belong to the LBHI estate and its creditors."

In the last four business days before its bankruptcy filing, Lehman said JPMorgan seized $8.6 billion of cash collateral, including more than $5 billion in cash on the last day.

As a result of the bank's insistence on the new agreements, its allegedly unjustified demands for billions in additional collateral and its refusal to return the collateral in the days leading up to Lehman's bankruptcy, the company said its liquidity was "severely constrained" and its ability to implement initiatives that would have preserved billions of dollars in value was impeded.

Through the lawsuit, Lehman is asking the court to order JPMorgan to return the billions of dollars of value it allegedly converted "and to restore all of the creditors to the position they would have occupied but for JPMorgan's wrongful conduct."

New York-based Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States. The company filed for bankruptcy on Sept. 15, 2008. Its Chapter 11 case number is 08-13555.

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