Billionaire Leonard Blavatnik accused JPMorgan Chase & Co. of losing 10% of the $1 billion he gave the bank to manage by making unauthorized investments in subprime mortgages.
A trial began today in New York State Supreme Court in Manhattan in the lawsuit that Blavatnik, 55, brought against JPMorgan in June 2009, accusing the biggest U.S. bank by assets of putting more money into risky mortgages than his investment guidelines allowed.
JPMorgan should be held responsible for the loss, Blavatnik, who is ranked 47th in Bloomberg’s billionaires index with a net worth of $15.3 billion, said in his lawsuit, because it loaded his Access Industries fund with
“This was not supposed to be a high-risk, swing-for-the-fences investment,” said Richard I. Werder Jr., an attorney with Quinn Emanuel Urquhart & Sullivan LLP, representing Blavatnik’s fund. “This was supposed to be the opposite: conservative and safe,” he told the court today.
JPMorgan has argued that CMMF rejected the “most conservative strategy” it was offered in favor of one that sought a higher return than a money-market fund, with higher risk and less liquidity, according to a pretrial memorandum.
The bank bought and held hundreds of millions of dollars of subprime securities for CMMF, the fund created by Access Industries, and converted what was supposed to be a “short-term, highly liquid and very conservative cash management account” into an account making a “massive bet” on the subprime mortgage securities sector, Blavatnik claims.
“This was a sucker’s bet,” lawyers for Blavatnik said in a pretrial brief. “If it paid off, CMMF would merely recoup its principal. By making this massive bet—which was completely unnecessary to achieve the account’s conservative objectives—JPM breached the parties’ agreement, acted negligently and caused enormous and avoidable losses of approximately $100 million.”
The securities had “extraordinary protection” against “all but the most catastrophic losses,” attorney Lewis R. Clayton of Paul Weiss Rifkind Wharton & Garrison LLP, representing JPMorgan, told the court today.
The securities had no defaults while JPMorgan managed the account, were AAA-rated when purchased and underwent no downgrades until March 2008, Clayton said.
“The market believed these securities were safe,” Clayton said. “Their own investment advisers believed these investments were safe.”
The account performed well until the fall of 2007, when events in the mortgage markets and the economy “began to have a negative impact,” New York-based JPMorgan said in the memorandum.
JPMorgan Investment Management believed that prices for the asset-backed securities and collateralized mortgage obligations in the account were depressed because of “short-term liquidity problems, not because of a realistic risk of loss of principal,” and thought CMMF should hold the investments for the long term and not take losses at “artificially depressed prices,” according to the memo.
“This view was shared by CMMF’s independent adviser, Nancy Zimmerman, a sophisticated financial professional who manages a multibillion-dollar hedge fund,” JPMorgan said in the pretrial memo. “CMMF also repeatedly made clear that it did not want to realize losses and objected vociferously when JPMIM sold one investment at a loss of approximately 5%.”
The account generated a net gain of almost $4 million until CMMF closed it in May 2008 and gave the securities to Zimmerman to manage, and not one of the investments defaulted and only two were downgraded during that time, JPMorgan said in the memo.
Justice Melvin L. Schweitzer is overseeing the non-jury trial in Manhattan. The trial is set to last as long as two weeks. Blavatnik isn’t scheduled to testify, according to a list of witnesses.
