Court Certifies Class in J.P. Morgan Securities Lending Suit

August 6, 2010 ( – A federal judge in New York has certified as a class action a lawsuit over J.P. Morgan Chase’s investment in structured investment vehicle Sigma Finance Inc. through its securities lending program.

The class includes investors who held Sigma Medium-Term Notes that were purchased in June 2007 and had a maturity date in June 2009. Sigma collapsed in September 2008.  

J.P. Morgan argued that five direct account holders out of the 76 total class members should not be included in the class because they cannot satisfy the predominance or superiority requirements to be included. According to the opinion, the implications of excluding the five are great because they collectively suffered approximately 80% of the total losses alleged.  

The court rejected J.P. Morgan’s argument, finding the individual issues it identified do not threaten to overwhelm the class, do not require the court to conduct numerous mini-trials, and do not make the class as a whole unmanageable.   

The class is represented by three separate retirement plans that entered into securities lending agreements with J.P. Morgan as their custodian: the AFTRA Retirement Fund, an Employee Retirement Income Security Act-governed plan; the Imperial County Employees’ Retirement System; and the Manhattan and Bronx Surface Transit Operating Authority Pension Plan. The three had filed separate lawsuits which were consolidated (see Plowing New Fields).   

The plans allege that J.P.Morgan breached its ERISA and New York state law-imposed fiduciary duties by investing in Sigma when it should have known that Sigma was a poor investment.  

The court noted that when J.P. Morgan purchased the Sigma notes the residential mortgage market had already begun to collapse, and as early as August 2007, analysts following Sigma and other SIVs warned that the lack of liquidity in the credit market, as well as the sharp declines in the market value of assets backing many SIVs, threatened their financial viability. Even J.P. Morgan’s securities lending program halted any new investments in SIVs in August 2007. J.P. Morgan’s internal analysts became concerned about whether Sigma would be able to pay par value of the notes upon maturity, but the firm never tried to sell or recommend the sale of the notes.  

In February 2008, J.P. Morgan, without disclosure to the class members, began repurchase financing with Sigma in exchange for collecting fees of more than $228 million. The class alleges this created a conflict of interest between J.P. Morgan and the class members.  

The case is Board of Trustees of the AFTRA Retirement Fund v. JPMorgan Chase Bank N.A., S.D.N.Y., No. 09 Civ. 686 (SAS).