JPMorgan denies gouging Lehman in $8.6 billion fight

Reuters

By Jeff Roberts

NEW YORK (Reuters) - JPMorgan Chase & Co urged a bankruptcy court on Tuesday to throw out Lehman Brothers Holdings' claim demanding that it hand over $8.6 billion in cash taken as collateral in the weeks before Lehman imploded in September 2008.

Continue Reading Below

Lawyers for JPMorgan denied that the bank had engaged in misconduct, and portrayed the lawsuit brought by the failed investment bank and its unsecured creditors as undeserved punishment for the bank's good deeds.

"Other creditors joined the run on the bank, unlike JPMorgan," Paul Vizcarrondo, a lawyer for the bank, argued before Judge James Peck in U.S. Bankruptcy Court in Manhattan.

Vizcarrondo, of law firm Wachtell, Lipton, Rosen & Katz, argued that JPMorgan had helped to mitigate the 2008 financial crisis by continuing to provide financial services to Lehman even after the fourth biggest U.S. investment bank filed for bankruptcy.

JPMorgan was Lehman's main clearing bank, acting as a go-between in its dealings with other parties.

JPMorgan filed a countersuit, accusing Lehman of sticking it with piles of loans that might never be repaid.

The bank accuses Lehman of providing it with deficient collateral in the form of securities that Lehman's own employees wrote off as "goat poo" and "toxic waste."

Both parties agreed at the outset of Tuesday's arguments that they would not address a related proceeding to strike JPMorgan's counter-claims.

LIFE AND DEATH POWER

Peck was mostly silent during JPMorgan's nearly three hours of arguments. When Lehman got its turn, however, the judge questioned lawyer John Quinn on the company's argument that the $8.6 billion at issue is not protected by so-called "safe harbor" laws.

Such laws can shield some financial transactions from being included in the pool of assets divided among creditors when a company files for Chapter 11.

"That seems to be in the sweet spot of safe harbors," Peck told Quinn, of law firm Quinn Emanuel Urquhart & Sullivan. "How can you say it is not?"

Lehman argues that JPMorgan used "its life and death power" over the firm to unfairly extract Lehman's remaining cash piles after learning from meetings with government officials and other inside sources that Lehman was about to collapse.

JPMorgan asked for the collateral in August and September 2008 as part of an arrangement to continue acting as a clearing house for Lehman's valuable brokerage business, much of which was based on repurchase agreements, or "repos," that involve loans of securities for short periods.

JPMorgan argued to the judge that broad safe harbor laws for financial firms are vital to the national interest and showed slides from a report by the Federal Reserve aimed at supporting its position.

The case is: Lehman Brothers Holdings Inc et al v. JPMorgan Chase, U.S. Bankruptcy Court for the Southern District of New York, Adversary Proceeding No. 10-03266.

(Editing by Ted Kerr)