JPMorgan says London Whale didn’t cause Lehman bankruptcy

The former JPMorgan Chase trader known as the “London Whale” was not responsible for Lehman Brothers Holdings’ bankruptcy and should not be dragged into a US$8.6 billion (HK$66.7 billion) lawsuit accusing the largest US bank of causing it, JPMorgan said.

According to a filing in Manhattan bankruptcy court, JPMorgan believes that Lehman’s own documentation showed that the trader, Bruno Iksil, had nothing to do with alleged mismarked derivative trades that are part of the dispute.

JPMorgan said Lehman and its unsecured creditors committee, which also seeks Iksil’s testimony, pointed to nothing that shows the bank’s Chief Investment Office had any role in collateral requests at the centre of Lehman’s lawsuit.

Getting Iksil involved now would waste time and money, JPMorgan said, particularly in light of statements by former US Treasury Secretaries Timothy Geithner and Henry Paulson that the collateral requests did not cause Lehman to fail.

“It is readily apparent that the only real reason for plaintiffs interest in taking Mr. Iksil’s deposition is that he has been in the news,” JPMorgan said.

Andy Rossman, a partner at Quinn Emanuel Urquhart & Sullivan representing Lehman, in a statement on Thursday said Iksil’s mismarked trades “resulted in improper demands for hundreds of millions of dollars of collateral. JPMorgan’s extraordinary effort to block that testimony is revealing.”

A hearing on Lehman’s request is scheduled for March 13.

Iksil gained notoriety after his activities were linked to US$6.2 billion (HK$48.1 billion) of trading losses at JPMorgan’s Chief Investment Office. The French national had worked in London for the New York-based bank.

Lehman employed JPMorgan as its main clearing bank, handling third-party dealings, prior to its September 15, 2008, bankruptcy.

It accuses JPMorgan of hastening its collapse by using what it learned in that role to extract US$8.6 billion of collateral in the four business days ahead of the Chapter 11 filing.

Citing Iksil’s “practice of intentional mismarking,” Lehman said it wanted to review trades that led to an “unjustified” US$273.3 million (HK$2.14 billion) collateral call on Sept. 9, 2008, which JPMorgan reversed the next day.

A Sept. 10, 2008 internal JPMorgan email linked Iksil to two trades by the Chief Investment Office in London that were then “significantly contributing” to a dispute with Lehman.

In addition, Lehman said it wanted to question Iksil over how the Chief Investment Office managed JPMorgan’s exposure to what was once Wall Street’s fourth-largest investment bank.

According to Lehman, Iksil’s lawyers have indicated he will not co-operate without an official request through international channels. Lehman has asked US Bankruptcy Judge James Peck in Manhattan for permission to start that process.

In a February 13 court filing, Lehman said it also wants to question other people who worked in JPMorgan’s Chief Investment Office around the time of the bankruptcy.

Last April, Peck narrowed but refused to dismiss Lehman’s lawsuit, saying the company could pursue claims that JPMorgan had acted in a “commercially unreasonable” manner.

Lehman emerged from Chapter 11 last March. It has said it hopes to repay creditors about US$65 billion (HK$504.1 billion). That process is expected to take several years.