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Blavatnik Sues JPMorgan for Losing $98M

Blavatnik sitting next to his co-owner in oil firm TNK-BP, Viktor Vekselberg. Valery Volkov

NEW YORK — Billionaire Len Blavatnik said JPMorgan Chase, his bank for 15 years, lost a tenth of the $1 billion he had it manage and, for redress, he did something he never did before: He sued.

JPMorgan, the second-biggest U.S. bank, put twice as much money into risky mortgages as Blavatnik’s investment guidelines allowed while Jamie Dimon, the bank’s chief executive, was unloading such investments from its own books, according to the complaint. Blavatnik tried for a year to resolve the $98 million loss before suing in June in New York state court, he said.

The dispute between the billionaire and the bank spotlights a common difference that investors and their money managers have in the wake of a financial crisis that wiped out at least $1.73 trillion of wealth. Blavatnik blames the bank for his reverses; the bank blames the market.

“This is my first litigation that I initiated,” Blavatnik said in an interview in New York. “I made several attempts to reach a solution.”

Both sides on Jan. 28 appealed a judge’s December order that tossed out two of Blavatnik’s claims while keeping two others alive. The case, which hinges on the definition of an “asset-backed security,” has begun the information-gathering, or discovery, phase.

The suit is “an improper attempt” to “use the courts to collect reimbursement for investment losses that have resulted from an extraordinary and unprecedented economic crisis that no one could have anticipated,” JPMorgan said in its court papers. “The lawsuit is a classic example of pleading with the benefit of 20/20 hindsight.”

Mary Sedarat, a JPMorgan spokeswoman, said the bank, which ranks behind Bank of America in assets, wouldn’t comment on the litigation.

In the interview, Blavatnik, 52, detailed his rags-to-riches life before the dispute: He was born in Ukraine, grew up near Moscow and attended that city’s Transportation Engineering Institute. He and his parents emigrated to the United States in 1978.

After earning a master’s degree in computer science from Columbia University in New York, he landed jobs at the Arthur Andersen accounting firm and Macy’s Inc. He also has a master’s from Harvard Business School in Cambridge, Massachusetts.

Showing an entrepreneurial bent, he began investing in New York co-op apartments. Later, he took interests in privatized companies in Russia amid the fall of the Soviet Union. New York-based Access Industries, which he founded in 1986, owns energy, chemical, aluminum, media and real-estate companies.

Blavatnik, a soccer fan and World War II history buff, is now a U.S. citizen worth $7 billion, according to three people familiar with his finances. That includes a $1 billion gain made Jan. 22 as a minority owner of United Company RusAl, which conducted an initial public offering in Hong Kong, the people said. He is also a suitor for Metro-Goldwyn-Mayer, owner of a 4,100-film library with titles that include “Rocky,” according to two people familiar with the situation.

“I think like any successful businessman he has strongly held views when he believes he’s right,” said Edgar M. Bronfman Jr., chairman and chief executive officer of Warner Music Group, on whose board Blavatnik sat until 2008. “I know Len’s a highly principled guy and would not do something unless he thought he was in the right.” Bronfman said he wasn’t familiar with the JPMorgan lawsuit.

Blavatnik says JPMorgan loaded his Access Industries fund with subprime and so-called Alt-A mortgages at the same time that CEO Dimon was ridding his bank of such exposure.

“One of the issues that we will be exploring in discovery is whether JPM sold the Access fund subprime securities that it owned and thereby reduced its subprime exposure,” said Richard I. Werder Jr., a New York partner at Los Angeles-based Quinn Emanuel Urquhart Oliver & Hedges, the 400-lawyer litigation firm that Blavatnik hired to handle the case.

JPMorgan said in court papers that the instruments it sold were different from those in the Access Industries account.

Other companies have accused the bank in lawsuits of stuffing portfolios with too much subprime-mortgage risk as it rid itself of the securities. They include bond insurer Ambac Financial Group and New Millennium Homes, a homebuilder in Calabasas, California. On Jan. 28, JPMorgan won dismissal of a similar suit brought by reinsurer Assured Guaranty, which has appealed that ruling.

The investment objective for Blavatnik’s fixed-income portfolio that JPMorgan began managing in May 2006 was “to provide a high level of current income consistent with low volatility of principal,” according to the guidelines cited in his complaint. Access Industries said its units needed to tap the money for their operations.

“Frankly, no one even said they were sorry — they said it was the market,” Blavatnik said of the $98 million loss. “It’s unfair. It’s not a way to treat one of your customers.”

Justice Melvin L. Schweitzer of New York State Supreme Court in Manhattan threw out Blavatnik’s claims for negligence and breach of fiduciary duty. He refused to dismiss accusations of breach of contract and negligent misrepresentation.

Schweitzer limited the contract claim to the question of whether JPMorgan exceeded the guidelines’ 20 percent cap on mortgage-backed securities. Those investments eventually topped 46 percent, according to the complaint.

JPMorgan, which earned more than $1 million managing the account, according to the complaint, disagrees.

The guidelines listed asset-backed securities separately from mortgage-backed securities. The bank categorized certain instruments backed by real-estate collateral, such as home-equity loans or second-lien mortgages, as asset-backed, according to the complaint.

Blavatnik argues that the real-estate instruments tagged as asset-backed are really mortgage securities. Because the bank’s statements didn’t break out the asset-backed securities into subgroups such as auto and student loans, Access Industries didn’t know the asset-backed category included exposure to mortgages, according to the complaint.

The bank said in court papers that it’s an industry practice to classify certain instruments, such as asset-backed securities and home-equity loans, as asset-backed. It also said its reports to Access Industries identified which securities were so categorized.

Alt-A securities “are a type of mortgage-backed security and thus capped by the guidelines at 20 percent,” JPMorgan wrote. Subprime securities “are a type of asset-backed security and thus capped by the guidelines at 40 percent,” it wrote.

Subprime mortgages are loans made to people with poor credit scores. Alt-A mortgages are loans made to people with higher credit scores than subprime borrowers who still don’t meet underwriting criteria established by government-sponsored entities such as the Federal Home Loan Mortgage, or Freddie Mac.

According to JPMorgan, the “overconcentration” of mortgage-backed securities happened because Blavatnik made “large cash withdrawals.” For example, in February 2007 he took out $455 million, or 24 percent of the account’s book value, which brought the mortgage securities up to 20.8 percent of the portfolio from 13.2 percent, the bank said.

“To the extent cash withdrawals skewed the allocation of the portfolio away from the guidelines, JPMorgan had a duty to adjust,” Access Industries argued in court papers.

Rebalancing the account by selling off mortgage securities would have generated losses, for which Blavatnik “would doubtlessly be suing,” the bank counterargued.

JPMorgan stuffed the portfolio with risky mortgages even though it knew the real-estate market was ebbing, according to the complaint.

In October 2006, Dimon, JPMorgan’s CEO, told William King, then its head of securitized products, that they needed to start selling its subprime-mortgage positions, Access Industries claimed in the complaint. By late 2006, JPMorgan had offloaded $12 billion in such mortgages that it had originated and was advising clients to follow suit, according to the complaint. Access Industries didn’t name the other clients.

At the same time, the bank told Access Industries to increase its subprime exposure, Blavatnik says. By January 2007, the portfolio had 23 percent in “risky residential real-estate securities” and, by the end of that July, more than 46 percent, according to the complaint.

That was the first month that the portfolio began to show big losses, shrinking in value by more than $2.1 million, according to the complaint.

JPMorgan calls the 46 percent figure “bogus,” a result of Access Industries’ combining mortgage- and asset-backed securities. It also says Dimon was referring to collateralized- debt obligations and structured-investment vehicles — different entities subject to different risks than the ones that Access Industries held.

“These statements therefore have nothing to do with the subprime or Alt-A mortgage-backed securities held in the account,” the bank wrote in court papers.

By November 2007, Access Industries couldn’t withdraw cash it needed, and by April 2008 the portfolio had lost more than $106 million, $98 million of which it blames on the residential real-estate investments, according to the complaint.

Access Industries said that when it started to complain about losses, JPMorgan told it that the securities were backed by government agencies.

JPMorgan said that was a “swiftly corrected error.”

As of December 2007, only two of 52 collateralized-mortgage obligations, accounting for $9 million, or just more than 1 percent of the portfolio, had government backing, Access Industries says.

While Blavatnik hasn't filed any suits himself, he has been involved in litigation and other disputes.

In December, unsecured creditors of his bankrupt Lyondell Chemical said he undercut them by settling a lawsuit that they brought against bank lenders, including Citigroup, three days before it was to be tried.

The creditors accused Blavatnik and the lenders of crippling the company with $22 billion in debt when he bought it in 2007. The creditors, who called the $300 million settlement “woefully inadequate,” told a bankruptcy judge Tuesday that they had secured a new accord to pay them $450 million.

Blavatnik and three Russian-billionaire partners were embroiled in more than three months of public acrimony in 2008 when they accused BP of treating their 50-50 joint venture in Russia like a subsidiary, ignoring their interests. The London-based oil company rejected those complaints.

The dispute was resolved with the Dec. 1 resignation of Robert Dudley, the venture’s CEO, whom the billionaires accused of mismanagement. Vice president Maxim Barsky will replace him next year. In the interim, Mikhail Fridman, one of the four owners, will run the company.

“I find him to be a very perceptive partner,” said Thomas H. Lee, head of New York buyout firm Lee Equity Partners. “He’s a guy who likes to invest for the future.”

Blavatnik and Lee were partners in the purchase of Warner Music from Time Warner in 2004, when Lee was still with his Thomas H. Lee Partners. Lee said he and Blavatnik have teamed up on other private investments, which he declined to name.

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