A New York appeals court on Thursday revived allegations that a JPMorgan Chase & Co. affiliate lost $1 billion in complex reinsurance investments for an Ambac Financial Group Inc. subsidiary despite following the letter of an investment agreement.
A lower court had gone too far in dismissing Ambac's complaint, and only should have determined if Ambac's allegations were "cognizable," according to a unanimous opinion by a five-judge panel of the First Department, a Manhattan appeals court.
Ambac Assurance UK Ltd. accused J.P. Morgan Investment Management Inc. of losing $1 billion from a $1.65 billion investment portfolio, a complex arrangement to fund reinsurance agreements, because the bank sank money into risky subprime mortgage-backed securities that did not adhere to the portfolio's conservative investment goals.
JPMorgan said that it had never exceeded limits in the investment agreement that restricted how much could be invested in specific types of securities, but Ambac said that the rote following of the letter of an investment agreement did not amount to managing those investments.
The lower court, in a March 2010 opinion by New York County Supreme Court Judge Barbara R. Kapnick, sided with JPMorgan. But the appeals court disagreed, ruling that "the distinction between 'limitation' and 'requirement' still eludes the defendant."
"In this case, the motion court overlooked the plain meaning of the [investment agreement] by misreading the limitations provision as a requirements provision," wrote Justice James M. Catterson.
"The plain meaning of 'limitations' connotes a point beyond which a party may not proceed. It is not a target that a party is obligated to meet which would instead constitute a 'requirement,'" Justice Catterson wrote.
If JPMorgan could argue that it didn't breach the investment agreement because it didn't exceed the investment limits, it "would allow the defendant to insulate itself from liability by closing its eyes to known risks, and so would render the contract's stated goal of 'a high level of safety of capital' impermissibly meaningless," the court ruled.
Ambac also relied heavily on statements that JPMorgan CEO Jamie Dimon made to the press in 2007 and 2008 indicating the bank was shedding risky mortgage-backed securities from its own portfolio, even as it held on to those kinds of securities in the reinsurance investment portfolio it was supposed to be managing. JPMorgan had contended that those statement were about different kinds of securities that weren't at issue in Ambac's suit.
But Dimon's statements related to "the entire mortgage market, including mortgage lending and mortgage products," and so it was too early to determine if the securities he was referencing were distinct from those in the complaint, the appeals court ruled.
A JPMorgan spokeswoman said Thursday that the case was still without merit.
"This is a preliminary decision related to the adequacy of the pleadings and not to the merits of the claims," said JPMorgan spokeswoman Kristen Chambers. An attorney for Ambac didn't immediately respond to a request for comment late Thursday.
Ambac and another insurer, Assured Guaranty (U.K.) Ltd., guaranteed notes linked to Scottish Re (U.S.) Inc. affiliate Ballantyne Re PLC that were backed by the portfolio managed by JPMorgan, according to court documents.