January 26, 2016 – JP Morgan Chase & Co will pay US$1.42 billion in cash to resolve most of a lawsuit accusing it of draining Lehman Brothers Holdings Inc of critical liquidity in the final days before that investment bank’s September 2008 collapse.
The settlement was made public yesterday, and requires approval by U.S. Bankruptcy Judge Shelley Chapman in Manhattan.
It resolves the bulk of an US$8.6 billion lawsuit accusing JP Morgan of exploiting its leverage as Lehman’s main “clearing” bank to siphon billions of dollars of collateral just before Lehman went bankrupt on Sept. 15, 2008, triggering a global financial crisis.
Lehman’s creditors charged that JPMorgan did not need the collateral and extracted a windfall at their expense.
Yesterday’s settlement also resolves Lehman’s challenges to JP Morgan’s decision to close out thousands of derivatives trades following the bankruptcy, court papers showed.
The accord would permit a further US$1.496 billion to be distributed to the creditors, including a separate US$76 million deposit, court papers showed.
More than US$105 billion has already been paid to Lehman’s unsecured creditors, Lehman has said.
“While the Settlement Agreement is not a global resolution of all issues between the parties, it ends a significant portion of their disagreements,” lawyers for Lehman and its creditors said in court papers. “The compromises set forth in the Settlement Agreement are a fair and equitable resolution.”
JP Morgan declined to comment. A spokeswoman for Lehman also declined to comment.
The settlement is not expected to have a material impact on JP Morgan’s earnings, a person familiar with the matter said.
Both sides settled nearly four months after U.S. District Judge Richard Sullivan ruled for JP Morgan, saying the largest U.S. bank had no obligation to keep Lehman alive and did not defraud it into providing collateral.
Once Wall Street’s fourth-largest bank, Lehman reported US$639 billion of assets when it filed for Chapter 11 protection, making its bankruptcy by far the largest in U.S. history.
Lehman emerged from bankruptcy in March 2012, and has since been winding down.