Compliance

J.P. Morgan Cleared of Charges for Lehman Investments

By Rebecca Moore editors@plansponsor.com | April 24, 2012

April 24, 2012 (PLANSPONSOR.com) – J.P. Morgan Chase (JPMC) did not breach its fiduciary duties to a pension plan by investing the plan's assets in Lehman Brothers notes through JPMC's securities lending program.

In dismissing the charges against JPMC, U.S. District Judge Barbara S. Jones of the U.S. District Court for the Southern District of New York pointed out that the fiduciary duty to act prudently under the circumstances at the time of the decision precludes any judgment of a fiduciary’s actions “from the vantage point of hindsight.” Even if references to news articles and basic financial modeling were sufficient to make it “theoretically conceivable” that JPMC should have known about Lehman’s weakening financial condition, such speculation is not enough to defeat a motion to dismiss, Jones said.  

Jones did agree that JPMC’s actions in 2008 -- demanding additional collateral and taking advantage of Lehman’s weak negotiating position -- suggest that JPMC harbored some concerns about Lehman’s creditworthiness, but she found that does not indicate JPMC knew that maintaining the plan’s investments in Lehman was unduly risky.  

The court also found the board of trustees of the Operating Engineers Pension Trust failed to provide facts to support its assertion that JPMC violated its duty to monitor the investments. “Plaintiff alleges only in the vaguest terms that JPMC failed to conduct a proper investigation into the Lehman investments and that JPMC did not exercise independent judgment in deciding to keep the plan invested in the Lehman notes,” Jones wrote in her opinion.  

Finally, the court rejected the pension plan’s assertion that a conflict of interest arising out of the fee arrangement between the plan and JPMC motivated JPMC’s breach of fiduciary duty. Jones concluded the plan entered into the securities lending arrangement freely and after arms-length negotiations; it cannot now claim the fee arrangement to which it agreed creates a conflict of interest to JPMC’s unfair advantage.   

The court opinion is here.