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JPMorgan Chase : J.P. Morgan to Pay $1.42 Billion to Settle Lehman Claims

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01/25/2016 | 08:06pm EDT

J.P. Morgan Chase & Co. has agreed to pay the remnants of Lehman Brothers Holdings Inc. $1.42 billion in cash to settle most of the failed investment bank's lawsuit over claims that J.P. Morgan illegally siphoned billions of dollars from Lehman before its collapse.

Representatives for Lehman and J.P. Morgan declined to comment.

The settlement comes after a federal judge last fall ruled for J.P. Morgan, saying the bank didn't abuse its leverage as Lehman's primary clearing bank to force the investment bank to hand over more collateral in the weeks before its September 2008 collapse.

The deal, unveiled Monday night in a filing in U.S. Bankruptcy Court in New York, resolves the bulk of Lehman's $8.6 billion lawsuit against J.P. Morgan and the bank's counterclaims against Lehman. It also puts to rest Lehman's challenges over J.P. Morgan's closeout of thousands of derivatives contracts following the investment bank's collapse.

Although the settlement doesn't resolve all the claims between Lehman and J.P. Morgan, it ends a "significant portion" of their disputes, court papers said, and allows the postbankruptcy Lehman estate to make another $1.5 billion distribution to the investment bank's creditors.

Lehman initially sued J.P. Morgan in May 2010, alleging in the suit that J.P. Morgan engaged in a "voracious" cash grab to create an $8.6 billion "slush fund" in the investment bank's final days. Lehman had pledged billions of dollars as collateral for tens of thousands of derivatives transactions with J.P. Morgan as well as for overnight loans arranged by the bank.

As Lehman's chief clearing bank, J.P. Morgan provided cash advances of as much as $100 billion a day to Lehman to facilitate overnight repurchase, or repo, agreements. That role resulted in J.P. Morgan being one of Lehman's main adversaries in numerous disputes surrounding the investment bank's demise as well as one of its largest creditors.

J.P. Morgan later countersued the investment bank, saying it extended to Lehman hundreds of billions of dollars in credit that actually benefited Lehman's creditors by avoiding a fire sale of the bank's assets in the days following Lehman's failure.

In the turbulent days after Lehman filed for bankruptcy, it sold its broker-dealer business to Barclays PLC. When the dust settled, J.P. Morgan said some $25 billion it had advanced to Lehman's broker-dealer was left unpaid and it was stuck with the illiquid securities that Barclays didn't want. To close the hole, J.P. Morgan applied $8.6 billion of collateral that Lehman's holding company had pledged to the bank in the days before its collapse.

Lehman, once the nation's fourth-largest investment bank, collapsed into the largest bankruptcy ever in September 2008. The filing sent markets into turmoil and helped trigger a global financial crisis.

The legal fight with J.P. Morgan is one of a few large remaining orders of business for Lehman, which officially emerged from chapter 11 protection in March 2012. Since then, the company, which is being overseen by a new board of directors, has paid back tens of billions of dollars to creditors while searching for more funds through lawsuits and settlements. The holding company is winding down and selling off its remaining holdings, a process that is expected to continue for several years.

Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
BARCLAYS PLC 1.36% 150.3 Delayed Quote.-0.03%
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