JPMorgan A 'Secret Hedge Fund,' Investors Allege

Nov 27 2012 | 11:39am ET

JPMorgan Chase shareholders have trotted out the dreaded epithet—"hedge fund"—in a revised class-action lawsuit against the bank.

The shareholders, led by several public pension funds, accuse the bank of turning its chief investment office into a "secret hedge fund." The move blew up in the bank's face when a trader known as the "London whale" cost it some $6 billion on bad credit-default swap index trades.

JPMorgan CEO Jamie Dimon "secretly transformed the CIO from a risk management unit into a proprietary trading desk whose principal purpose was to engage in speculative, high-risk bets designed to generate profits," the revised class-action complaint, filed last week in New York federal court, alleges.

The JPMorgan investors, led by the Arkansas Teacher Retirement System, Ohio Public Employees Retirement System and the state of Oregon, also named former chief investment officer Ina Drew, chief financial officer Douglas Braunstein and corporate and investment banking co-CEO Michael Cavanagh in the complaint, alleging that "JPMorgan senior management made a conscious, strategic decision to use the CIO for proprietary trading in pursuit of short-term profits."

The lawsuit covers investors who bought JPMorgan stock between Feb. 24, 2010 and May 21, 2012.

The complaint takes particular aim at JPMorgan's decision not to create a liquidity reserve to backstop the Bruno Iksil—the whale—portfolio. "Because the company never took the liquidity reserve it was required to have taken, the company's net income was overstated by at least $2 billion each quarter during the class period, rendering JPMorgan's financial statements materially false."

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