I’m on RT’s top financial show, Keiser Report, today talking about JP Morgan and the cascade of fraud the bank keeps trying to cover up. We learned last week Jamie Dimon had model the bank’s whale trade loss at a possible $9 billion but didn’t mention this when congress asked him to come in for an explainer on how he massively screwed up the bank’s risk management. JPM’s shareholders aren’t getting a lot of transparency from the bank’s leadership and I’ve learned there is another little problem coming to forefront.
A Connecticut state court judge has ordered whistleblower documents and internal emails sent to the SEC last year turned over to UBS who’s suing a JP Morgan owned hedge fund. According to a suit filed by ex-JPM’er Kevin Dillon the secret documents allegedly show JP Morgan’s back office trading administration worked with a Hedge Fund, Texas-based Highland Capital, to manipulate the net asset value of their fund’s assets. Court filings claim this was all done to get the Swiss banking giant, UBS, to lend them more money when they were in a performance death spiral and not let on to their investors that trouble was brewing in an effort to starve off redemptions.
The UBS lawsuit shows a complicated financial restructuring of a mega-million security by JPM’s staff to cover up the assets that likely should have failed sooner than they did. There are allegations of amping up the NAV to attract more investor money until the financial crisis whipped them into a tail spin they couldn’t recover from. Until a low-level internal whistleblower started gathering docs and complaining to his superiors we might have never known how deep the alleged deception was. Dillon was fired, sued, got some cash from JP Morgan in a private settlement but now UBS plans to reopen the wound and not let JP Morgan hide their bad behavior.
When UBS, who claims to have lost near $700mn on the Highland fraud, gets the whistleblower documents from Dillon’s Greenwich attorney Mark Sherman we could see all kinds of nasty emails exposing illegal acts like: back dating cross-trades between funds, applying trade-date accounting to up the NAV without settling trades, and moving crap assets out of one fund into another fund while making it look nice and rosy so UBS wouldn’t slam them with margin calls. Sherman said in CT state court filings last month there are actually 36,000 whistleblower documents he sent the SEC but since his whistleblower client, Dillon, signed a settlement with JP Morgan he won’t give them up for public viewing until the court orders it. Well, that’s happen now and when UBS gets their hands on the docs I’d expect the Swiss bank to file more evidence or claims attached to their fraudulent conveyance lawsuit that will basically outline a securities fraud case for the SEC against Highland and JP Morgan. If Sherman doesn’t request a protective order then the public will get a view of what kind of dirt the SEC has against JP Morgan/Highland.
Sherman’s used the new Dodd-Frank whistleblower law to score the largest reward for a client in the Art Samberg / Pequot Capital SEC settlement and it’s clear he’s hoping the SEC wakes up to the shenanigans at JP Morgan and files suit soon or moves right to a financial settlement with Highland/JPM. I realize it’s a big non US bank suing a big US bank for fraud so the case isn’t high on the SEC’s list but if we are seeing asset value manipulation within JP Morgan’s own hedge fund you have to wonder what other hedge funds JP Morgan has aided and abetted securities fraud with.
Highland Capital was run by James Dondero and became insolvent during the financial crises four years ago. The UBS lawsuit is FST-CV12-6013682-S and can found in Stamford, CT State Court.