JPMorgan Accused Of Profiting From Souring Sigma Investment, While Clients Lost Millions

In newly unsealed court document JPMorgan, the nation's second largest bank by by assets, is accused of profiting from a troubled investment vehicle, while keeping client money in the same failing group of securities.
According to documents first unearthed by the New York Times, despite high-reaching concerns at JPMorgan about a structured investment vehicle (SIV) called Sigma, the bank kept client money in the deal and profited off its collapse.

The class action suit, filed on behalf of a several pension funds, accuses JPMorgan of earning "substantial fees and interest" and hundreds of millions more from colleteral on short term loans, for total of $1.9 billion. JPMorgan's clients, the suit argues, lost almost all of the $500 million the bank had invested on their behalf.
JPMorgan, the suit argues, breached its fiduciary duty to protect clients' investments by placing its own interests first, and by failing to disclose information about Sigma's troubles. The thrust of the argument is that it the bank not only failed to act in the best interests of its clients, but also profited from client losses.

The actions of JPMorgan reflect a "blatant disregard of this fundamental duty," the suit reads. "The undisputed record evidence establishes that JPMorgan knowingly and intentionally enriched itself despite having actual knowledge that its actions would substantially impair the financial interests of the Class."

The suit lays out in detail how JPMorgan, along with a host of Wall Street analysts, allegedly predicted the demise of Sigma. The original complaint documents the warning signs that came before Sigma's collapse and JPMorgan's alleged failure to disclose the information to clients with money invested in it. It also emphasizes that the type of investment -- a "Securities Lending Agreement" -- JPMorgan made on behalf of its clients was supposed to be "conservative." From the suit:

According to the Securities Lending section of JPMorgan's website, the stated purpose for its Securities Lending Program is to "obtain an attractive return while minimizing risk."

A spokesman for the bank told the New York Times that some of accusations in the suit were "ludicrous" and claimed that JPMorgan did its best to protect clients' interest in its dealings with Sigma.

In one email unearthed in the lawsuit, a JPMorgan executive wrote that the bank was treating its loans to Sigma as "trades" rather than support for the failing investment vehicle.

JPMorgan is not the first bank that has been accused of putting its own interests before its clients'.

Last year, Goldman Sachs spent $550 million to settle civil fraud charges brought by the SEC, in which the bank was accused of misleading investors and profiting from a group of securities allegedly designed to fail. As a part of the settlement, the bank admitted no wrongdoing, but acknowledged it had "made a mistake" in the disclosures it made to clients.