In the State Supreme Court in Manhattan, Justice Melvin Schweitzer found JPMorgan Chase (JPM) liable for breach of contract when it put high-risk subprime mortgages in an account held by investor Leonard Blavatnik. Now, the financial firm must pay the Russsian-American billionaire more than $50 million in damages–$42.5 million for the breach and 5% interest from beginning May 2008. However, JPMorgan was not found liable for negligence.
Blavatnik, who Forbes magazine says is the 44th wealthiest person in the world, filed his securities fraud case against JPMorgan in 2009. He contended that the investment bank lost over $100 million on about a $1 billion investment made by CMMF L.L.C., which is a fund that Access Industries, his company, created. He says JPMorgan promised him that the money would be invested conservatively but instead breached a 20% mortgage-backed securities limit when it misclassified securities that were backed by a subprime loans pool—ABS home-equity loans—as asset-backed instead of as MBSs.
Access, Blavatnik’s company, claims that the bank kept holding the securities even though it knew that they were not right for the portfolio. In May 2008, CMMF shut down the account.
Judge Schweitzer found the bank liable for going beyond the cap limit while rejecting the firm’s claim that it was a practice in the industry to separately classify mortgages securities and home equity loans because they don’t a carry the same risk. Regarding the negligence claim, he said that the mortgage securities were generally safe when they were purchased and that the financial firm behaved reasonably when it suggested CMMF wait instead of selling at such low prices.
Meantime, JPMorgan also is contenting with other investigations and lawsuits over the way it dealt with its mortgage business during the economic crisis of 2008.
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