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Bailey McCann, Opalesque New York:
The U.S. Commodity Futures Trading Commission (CFTC) has settled charges against New York-based, JPMorgan Chase Bank N.A. for unlawful handling of Lehman Brother’s customer segregated funds. JPMorgan will have to pay a $20m fine and rework their processes to ensure proper handling of segregated funds in the future.
From November 2006 to September 2008, JPMorgan served as the depository institution for Lehman Brothers handling customer segregated funds in excess of $250m. According to the CFTC, during this period, JPMorgan extended intraday credit to Lehman Brothers for proprietary transactions including repos, credit that was extended based on the level of positive "net free equity," Lehman had with JPMorgan. JPMorgan was using segregated fund deposits as part of the calculation of that equity even though that money belonged to individuals rather than to Lehman, in violation of the Commodity Exchange Act (CEA).
When Lehman filed for bankruptcy, the firm asked that JPMorgan release customer segregated funds, a request which was denied by JPMorgan. The request was denied because as soon as Lehman filed for bankruptcy, JPMorgan indicated that they no longer had any positive net free equity, based on a calculation that included customer funds outlined in the release request. The CFTC says that JPMorgan continued to decline release requests for two weeks and only released funds after being compelled by CFTC officials.
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