London Whale didn’t cause Lehman bankruptcy: J.P. Morgan

Reuters: The former J.P. Morgan Chase trader known as the ‘London Whale’ was not responsible for Lehman Brothers Holdings bankruptcy and should not be dragged into an US$ 8.6 billion lawsuit accusing the largest US bank of causing it, J.P. Morgan said.

According to a Wednesday filing in Manhattan bankruptcy court, J.P. Morgan believes that Lehman’s own documentation showed that the trader, Bruno Iksil, had nothing to do with alleged mismarked derivative trades that are part of the dispute.

J.P. Morgan said Lehman and its unsecured creditors committee, which also seeks Iksil’s testimony, pointed to nothing that shows the bank’s Chief Investment Office had any role in collateral requests at the centre of Lehman’s lawsuit.

Getting Iksil involved now would waste time and money, J.P. Morgan said, particularly in light of statements by the former US Treasury Secretaries Timothy Geithner and Henry Paulson that the collateral requests did not cause Lehman to fail.

“It is readily apparent that the only real reason, for plaintiff’s interest in taking Iksil’s deposition is that he has been in the news,” J.P. Morgan said.

A partner at Quinn Emanuel Urquhart and Sullivan representing Lehman Andy Rossman, in a statement on Thursday said Iksil’s mismarked trades “Resulted in improper demands for hundreds of millions of Dollars of collateral. J.P. Morgan’s extraordinary effort to block that testimony is revealing.”

A hearing on Lehman’s request is scheduled for 13 March. Iksil gained notoriety after his activities were linked to US$ 6.2 billion of trading losses at J.P. Morgan’s Chief Investment Office. The French national had worked in London for the New York-based bank.

Lehman employed J.P. Morgan as its main clearing bank, handling third-party dealings, prior to its 15 September 2008 bankruptcy.

It accuses J.P. Morgan of hastening its collapse by using what it learned in that role to extract US$ 8.6 billion of collateral in the four business days ahead of the Chapter 11 filing. Citing Iksil’s “Practice of intentional mismarking,” Lehman said it wanted to review trades that led to an ‘unjustified’ US$ 273.3 million collateral call on 9 September, 2008, which J.P. Morgan reversed the next day.

A 10 September, 2008, internal J.P. Morgan email linked Iksil to two trades by the Chief Investment Office in London that were then ‘significantly contributing’ to a dispute with Lehman.

In addition, Lehman said it wanted to question Iksil over how the Chief Investment Office managed J.P Morgan’s exposure to what was once Wall Street’s fourth-largest investment bank.

According to Lehman, Iksil’s lawyers have indicated he will not cooperate without an official request through international channels. Lehman has asked the US Bankruptcy Judge James Peck in Manhattan for permission to start that process.

In a 13 February court filing, Lehman said it also wants to question other people who worked in J.P. Morgan’s Chief Investment Office around the time of the bankruptcy.

Last April, Peck narrowed but refused to dismiss Lehman’s lawsuit, saying the company could pursue claims that J.P. Morgan had acted in a ‘commercially unreasonable’ manner.

Lehman emerged from Chapter 11 last March. It has said it hopes to repay creditors about US$ 65 billion. That process is expected to take several years.