Pensions Allege JPMorgan Transformed CIO Unit Into Risky Prop-Trading Desk

A group of pension funds have filed a lawsuit against JPMorgan Chase & Co--the biggest bank by assets in the United States--noting that it has turned its risk-management unit into a "secret hedge fund" resulting in monumental losses.

(November 25, 2012) — A group of pension funds have claimed that JPMorgan turned its chief investment office into a secret hedge fund that caused more than $6.2 billion in losses.

JPMorgan Chief Executive Officer 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 plaintiffs alleged, as reported by Bloomberg. The lead plaintiffs, which include the Arkansas Teacher Retirement System, the Ohio Public Employees Retirement System, and the state of Oregon, allege that the bank’s risk-management practices misled investors, causing the more than $6.2 billion in losses.

The complaint was filed on behalf of JPMorgan shareholders who bought stock between February 24, 2010, when the company filed its 2009 earnings report with regulators, and May 21, 2012, when the bank revealed it was putting an ends to a $15 billion share buyback program until it could control the losses, Bloomberg reported.

“JPMorgan senior management made a conscious, strategic decision to use the CIO for proprietary trading in pursuit of short-term profits,” the plaintiffs said.

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The pension funds claim they suffered losses in their holdings as a result of trades by the chief investment office along with Bruno Iksil, known as “the London Whale.” In July, Ohio’s attorney general announced that three of the state’s largest pension funds would seek lead plaintiff status in the shareholder lawsuit against JPMorgan. Attorney General Mike DeWine, the Ohio Public Employees Retirement System, the School Employees Retirement System of Ohio, and the State Teachers Retirement System of Ohio said at the time that it would sue JPMorgan over losses of $27.5 million that resulted from the bank’s plunging stock value. The state accused JPMorgan of deceiving investors about its trading activity by “describing risky and speculative trading strategies merely as ‘hedges’ and ‘risk management’ devices.”

“The filings allege that pension fund managers acting on behalf of Ohio retirees were given false and misleading information by JPMorgan Chase that hid the true nature of the bank’s risky trades, causing Ohio teachers, school employees, and public employees to lose tens of millions of hard-earned retirement dollars,” said DeWine at the time.

(November 25, 2012) — Dynamic de-risking, using ‘alternative hedging’ assets, and exploring how to exploit the inherent illiquidity in portfolios – these are on most pension fund CIOs’ agenda for the New Year, according to a survey by a leading consultant in the United Kingdom.

A group of 100 CIOs and investment directors from some of the largest pension funds in the UK ranked dynamic de-risking as one of the most pressing actions to take up over the next six months. The approach of putting triggers in place to lock in improved funding levels as they happen found favour with 67 of the 100 pension fund managers responding to a survey by Towers Watson last week.

Second on the “to-do” list was employing alternative hedges to match liabilities as traditional assets have been disappointing and projected returns have looked unlikely to improve. Towers Watson said these alternatives could include listed and unlisted infrastructure and types of secure income investments. Some 51 of the 100 investors said this was something they were keen to action in the next year.

Exploiting the long-term characteristics of their portfolio was next on the list for the investors. Some 43 of the 100 said they would be looking into exploiting the premium that could be earned by holding illiquid assets, such as real estate, infrastructure, and other unlisted assets.

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Just over a third said they would look at new investment ideas.

The least number of investors said they would be addressing the structure of their investment boards. Only 16 said they would be reviewing their governance arrangements in the next 12 months.

At the end of October, the average UK corporate scheme was 82.4% funded, according to the lifeboat for bankrupt funds, the Pension Protection Fund (PPF). The organisation said over 81% of these funds were either fully funded – on a buyout basis – or in surplus. The aggregate deficit was over £227 billion.