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Judge Rules for J.P. Morgan in $8.6 Billion Lehman Lawsuit

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10/01/2015 | 12:45pm EDT

A federal judge in New York granted a victory to J.P. Morgan & Co. in its $8.6 billion legal fight with Lehman Brothers Holdings Inc.'s, rejecting the failed investment bank's claim that J.P. Morgan illegally siphoned billions of dollars from Lehman before the bank's collapse.

Judge Richard Sullivan of the U.S. District Court in New York said J.P. Morgan 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 historic September 2008 collapse.

In a 31-page decision made available Thursday, Judge Sullivan said he rejected Lehman's "fundamental premise" that J.P. Morgan "was obligated to extend credit to Lehman under its credit agreement."

While the judge granted the bulk of J.P. Morgan's summary judgment motion to dismiss Lehman's claims, he said the investment bank could pursue its bid to subordinate J.P. Morgan's claim to those of other creditors.

A J.P. Morgan spokesman said the bank was pleased with the ruling. A spokeswoman for Lehman's postbankruptcy estate declined to comment.

Lehman initially sued J.P. Morgan in May 2010, alleging 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.

As Lehman's clearing bank, J.P. Morgan provided cash advances of up to $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, 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.

Like other Wall Street broker-dealers, Lehman depended on the tri-party repo market to fund its business. In a typical tri-party repo, a bank like J.P. Morgan acts as the middleman between money-market funds lending cash and a broker-dealer like Lehman.

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 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. Lehman's brokerage business was quickly sold to Barclays.

The 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. However, because it has billions of dollars in remaining assets and more money to pay back creditors, as well as ongoing litigation with J.P. Morgan and others, the bank is expected to exist in some form for years to come.

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

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Stocks mentioned in the article
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ACCESS CO., LTD. -1.40% 915 End-of-day quote.-4.19%
BARCLAYS PLC 1.01% 92.9 Delayed Quote.-48.80%
LETS HOLDINGS GROUP CO., LTD. -1.54% 10.22 End-of-day quote.69.21%
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