A lawsuit against JPMorgan Chase & Co., and various affiliates and employees (collectively, “JPMorgan”), claiming they improperly induced MBF Clearing Corp, a former futures commission merchant, to improperly invest customer funds, was dismissed last week by a New York State trial court judge. MBF and an affiliated company had claimed that, in 2008, JPMorgan encouraged the firm to invest customer funds in a proprietary fund – the J.P. Morgan U.S. Government Money Market Fund. However, subsequently, in March 2012, the Commodity Futures Trading Commission brought an enforcement action against MBF claiming the firm’s investment of customer funds in the USG Fund violated CFTC rules. This was because, as expressly stated in the USG Fund’s prospectus, redemption requests for the USG Fund could take up to seven days, and even longer under certain circumstances. However, under the applicable CFTC rule, FCMs may only invest customer funds in money market funds that meet certain conditions, including that redemption requests are legally required to be met by the next business day following a request. (Click here to access the CFTC complaint against MBF.) MBF was also charged with depositing customer funds with JPMorgan without obtaining a proper acknowledgment letter from the bank and for not ensuring its accounts at JPMorgan were properly titled as reflecting customer funds. MBF settled its CFTC action in November 2012 by payment of a fine of US $650,000. (Click here to access the relevant Consent Order.) MBF brought this action against JPMorgan alleging the bank wrongfully solicited MBF to invest customer funds in an unauthorized vehicle, and failed, after an initial period, to reflect MBF’s investment as being on behalf of its customers on account statements. MBF sought damages in excess of US $50 million for projected lost profits, claiming that the bank’s wrongful actions led to the subsequent CFTC complaint against it, and caused the firm to have to withdraw its FCM license and become solely an introducing broker. The judge – The Hon. Jeffrey K. Oing of the Supreme Court of the State of New York – granted JPMorgan’s request to dismiss MBF’s lawsuit, saying the plaintiffs “failed to allege sufficient facts to support justifiable, reasonable reliance, particularly where documentary proof indicates that plaintiffs undertook due diligence.”

Compliance Weeds: Under law, CFTC-registered futures commission merchants may invest customer funds in certain government obligations. The CFTC expanded the list of permitted investments in 2000 to add money market funds among other authorized investments. However, investments in MMFs are subject to strict conditions, including that redemption requests must legally be honored by no later than the business day following a request. After the collapse of MF Global in October 2011, the CFTC restricted its previously expanded list of permissible investments of customer funds. Among other things, the version of the relevant rule now in effect precludes FCMs from investing customer funds in non-US government guaranteed corporate obligations and foreign sovereign securities, and engaging in repurchase transactions with affiliated companies. In addition, the revised rule imposes concentration limits for certain asset classes (e.g., the maximum percentage an FCM can hold of that asset type compared to its total customer funds held in segregation) and has strict issuer-based concentration limits. (Click here to access the current version of CFTC Rule 1.25.) The CFTC considers that its customer funds' investment requirements must be adhered to at all times and has already brought enforcement actions against FCMs for their failure to meticulously comply with its new post-MF Global requirements. (Click here for further information on the CFTC’s investment rule for customer funds in the article “CFTC Adopts Final Rule on Investment of Customer Funds” in the December 9, 2011 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP. Click here and here for prior editions of Bridging the Week containing articles related to CFTC enforcement actions against FCMs for not meeting new post-MF Global collapse customer funds’ investment requirements.)