JPMorgan Chase illegally allowed Lehman Brothers, the investment bank whose 2008 bankruptcy brought the financial system to the brink of collapse, to count customers’ money as its own, according to federal regulators.
The arrangement boosted the amount that Lehman could borrow from JPMorgan, where the customers’ money was deposited, regulators said last week. Then, at the height of the financial crisis, JPMorgan refused to release the customer funds for about two weeks, until regulators ordered it to do so, regulators said.
The charges were spelled out in an enforcement action against JPMorgan by the Commodity Futures Trading Commission.
Without admitting or denying wrongdoing, JPMorgan agreed to pay $20 million to settle the civil case.
The matter adds another dimension of alleged lawbreaking to the history of Lehman’s downfall. It also provides another vivid illustration that, even in highly regulated modern financial firms, basic controls can break down.
Last fall, the big brokerage firm MF Global collapsed with as much as $1.6 billion of customer funds missing and unaccounted for.
There, too, it appears that clients’ money was treated as if it belonged to the firm.
The customer deposits at issue in the Lehman matter, which totaled from about $250 million to more than $1 billion at any time, were supposed to have been held for customers who were using Lehman as a broker for futures and options trades.
Federal law declares that such funds should not be commingled with those of the firm, the commission said.
In a statement Wednesday, JPMorgan said it mistakenly factored the balance into a daily calculation of (Lehman Brothers) assets to determine the amount of credit the firm was willing to extend to (Lehman Brothers).
No customer funds were lost, and the commission did not accuse JPMorgan of intentional wrongdoing, JPMorgan said.
Lehman imploded largely under the weight of its borrowing.