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.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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