Remember the days when a hedge fund losing billions was news? Wise men would knot up their brows and wonder if hedge funds weren’t too loosely regulated or were creating some kind of systemic risk. After what we’ve been through in the past year that all seems like the good old days.
We were reminded of this today when we discovered that Amaranth’s lawsuit against JP Morgan Chase was still going on. It seems like a lifetime ago that the fund run by Nick Maounis imploded amid bad bets on natural gas. It was the trade that made Brian Hunter, Amaranth’s lead energy trader, famous. Amaranth lost $6 billion, collapsed, and sold its assets to JP Morgan and Citadel.
Afterwards, there were recriminations in all directions. Hunter is said to blame Maounis for not having the available cash to cover the margin calls. Maounis, for his part, felt he was done in by nefarious deeds at his prime broker, JP Morgan. Those feelings because a lawsuit, of course.
Here’s how Dow Jones Newswire describes Maounis’ claims:
In its lawsuit filed last November, Amaranth had alleged JPMorgan used its position as Amaranth’s clearing broker to prevent the hedge fund from transferring the remaining risk in its natural-gas derivatives portfolio to Goldman Sachs Group Inc. (GS) and later made false statements to kill a deal with Citadel Investment Group LLC.
The judge in the case dismissed all the claims save for Maounis’s breach of contract claim against JP Morgan.
Dow Jones: The fund had sought at least $1 billion in damages from JPMorgan.
In its lawsuit, Amaranth claimed that JPMorgan refused to execute a trade on Sept. 18, 2006, that would have transferred the fund’s natural-gas derivatives positions to Goldman Sachs in exchange for a concession payment of $1.85 billion from the fund. As a result, Goldman walked away from the deal.
The lawsuit alleges JPMorgan wanted to take control of the natural-gas portfolio itself in hopes of making substantial profits and the fund suffered several hundred million dollars of additional market losses on Sept. 18, 2006, as a result of JPMorgan’s refusal to execute the transaction.
JPMorgan ultimately entered into a trade with Amaranth and then a subsequent agreement with a Citadel affiliate, pocketing $725 million, according to the lawsuit.
It is ironic that the lawsuit will put JP Morgan’s prime brokerage business under the court’s microscrope now that JP Morgan is basically the hottest prime brokerage on the street. If it turns out that JP Morgan’s prime business is crooked, where will fund managers go?
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