CFTC SANCTIONS JPMORGAN OVER HANDLING OF LEHMAN CUSTOMER FUNDS

Resurging enforcement officials at the Commodity Futures Trading Commission brought another significant enforcement action this week. The settled proceeding was against JPMorgan Chase Bank, N.A. It arose out of the unlawful handling of customer segregated funds belonging to Lehman Brothers Inc. customers shortly prior to and after that firm’s bankruptcy. This is the same issue which is at the center of the current inquiry regarding the collapse of MF Global.

The Commodity Exchange Act and the pertinent regulations prohibit depository institutions from using or holding segregated funds that belong to a customer of a futures commission merchant as though they belong to anyone other than the customer. From November 2006 through September 2008 Lehman Brothers, a registered FCM, deposited funds with the bank. Those deposits included large amounts of customer segregated funds which always exceeded $250 million. During the period JPMorgan extended intra-day credit to Lehman daily based on its “net free equity.” That sum was not to include customer segregated amounts.

As early as November 17, 2006 however Lehman’s customer segregated funds were included in the calculation of “net free equity,” the predicate for the bank’s daily advances to Lehman. That violated the prohibitions regarding customer segregated funds. In addition, after the September 15, 2008 Lehman bankruptcy filing the bank improperly declined a request to release the customer segregated funds from Lehman. JPMorgan maintained its refusal for another two weeks until directed to release the funds by CFTC officials. No customer suffered a loss.

To resolve the action JPMorgan agreed to pay a $20 million civil monetary penalty. The bank also agreed to implement undertakings to ensure the proper handling of customer segregated funds in the future.