Fri, May 18, 2012
Dewey to consider bankruptcy filing: source
By Nick Brown and Nate Raymond
NEW YORK (Reuters) - Ailing law firm Dewey & LeBoeuf is considering a bankruptcy filing as new debtholders take a more aggressive track, shifting away from earlier attempts at an out-of-court liquidation, a person familiar with the matter said on Friday.
The majority of Dewey's partners have quit as a result of concerns about compensation, and $225 million in bank loans and bond debt.
Buyers of distressed debt who have acquired Dewey's debt at a discount on the secondary market are more open to seeing the firm wound down in bankruptcy court rather than out of it, said the person, who requested anonymity because the information was not public.
With the emergence of new creditors, Dewey on Tuesday replaced restructuring adviser Development Specialists Inc. (DSI) with competitor Zolfo Cooper. Joff Mitchell, a senior managing director at Zolfo, is now Dewey's chief restructuring officer, two people familiar with the situation said.
Bill Brandt, chief executive of DSI, confirmed that his firm's involvement in the matter was coming to an end.
"Our firm is transitioning out," Brandt said. "We've been replaced by Zolfo at the insistence of the debt holders. It now becomes a creditor-driven case."
A bankruptcy filing is not certain, and the timing of any potential filing remains unclear. The firm has been consulting with restructuring lawyers since April at the latest, and has retained bankruptcy attorney Albert Togut of law firm Togut Segal & Segal.
Neither Stephen Horvath III, Dewey's executive partner, nor Janis Meyer, its general counsel, responded to requests for comment. Mitchell and a spokesperson for Zolfo also did not respond to requests for comment.
Togut did not respond to a request for comment on Friday.
A spokesman for the firm's primary bank lender, JPMorgan Chase & Co, declined to comment late on Friday.
Once one of the largest law firms in the United States, Dewey & LeBoeuf has lost all but a handful of the 300 partners with which it opened 2012. It has laid off 433 of 533 employees in New York, according to the New York State Labor Department.
Dewey's debtholders have been selling their stakes during the firm's downfall. As of May 3, bankruptcy analyst Kevin Starke of CRT Capital Group said Dewey's $150 million in notes privately placed following a 2010 bond offering were trading at between 45 cents and 55 cents on the dollar on the secondary market.
The shift toward a possible bankruptcy filing would be a major change in direction. As recently as March 12, Martin Bienenstock, formerly a top bankruptcy partner at Dewey and an outgoing member of the firm's office of the chairman, told the Wall Street Journal that the firm had "no plan to file a Chapter 11 bankruptcy."
"We've had a completely non-adversarial relationship with our lenders, and right now the cash we're using is the lender's collateral," he said at the time.
Bienenstock did not respond to a request for comment late on Friday. He was one of four members of Dewey's top management team, the office of the chairman, to decamp to other firms in recent days, joining Proskauer Rose. The last member of that office, Washington, D.C., lobbyist L. Charles Landgraf, said he had joined Arnold & Porter on Wednesday.
Lawsuits are mounting against Dewey. The U.S. Pension Benefit Guaranty Corporation sued the firm Monday in Manhattan federal district court in order to take control of three of the firm's pension plans, which the agency said were underfunded by $80 million.
Bankruptcies are often driven by creditors. On Wednesday, Annette Jarvis of Dorsey & Whitney, a bankruptcy lawyer who represents a group of 51 retired pension partners at Dewey predecessor LeBoeuf Lamb Greene & MacRae, said that in her view the firm "has to be put into a bankruptcy."
Jarvis did not respond to a request for comment on Friday.
(Reporting By Nate Raymond and Nick Brown; Editing by Daniel Magnowski)
Fri, May 18, 2012
CFTC opens probe into JPMorgan trading loss: source
(Reuters) - The Commodity Futures Trading Commission (CFTC) has opened an investigation into possible wrongdoing at JPMorgan Chase & Co in connection with the bank's multi-billion-dollar trading loss, a source familiar with the probe told Reuters.
The agency will soon disclose the existence of the investigation, the source said on Friday.
Earlier on Friday, the New York Times reported that the CFTC had opened an enforcement case, quoting people briefed on the matter.
The CFTC would join the FBI and the U.S. Securities and Exchange Commission among federal agencies examining the loss, which the largest U.S. bank said last week was at least $2 billion.
The CFTC has disclosed an investigation into last October's collapse of MF Global Holdings Ltd, a futures and commodities brokerage from where large sums of customer money remain missing.
JPMorgan spokesman Joe Evangelisti declined to comment. The CFTC did not immediately respond to a request for comment.
The bank has not been accused of wrongdoing, and the newspaper said all of the investigations into its trading loss are preliminary.
CFTC Chairman Gary Gensler is expected to reveal his agency's investigation when he testifies before the Senate Banking Committee on Tuesday, the newspaper said.
JPMorgan Chief Executive Jamie Dimon is also expected to testify before that committee, after hearings on Wall Street reforms that are expected to end on June 6.
The CFTC began tracking JPMorgan's trading in April, the newspaper said, when reports surfaced that London-based trader Bruno Iksil was taking big bets in credit derivatives.
Its probe may examine whether the bank's trading affected that market, the newspaper said.
(Reporting By Jonathan Stempel in New York and Alexandra Alper in Washington,; Editing by Daniel Magnowski)
Fri, May 18, 2012
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Fri, May 18, 2012
Analysis: JPMorgan to be haunted by change in risk model
By David Henry
(Reuters) - JPMorgan Chase & Co's decision to radically change the way risk was measured in its Chief Investment Office is likely to dog the bank in the developing crisis over the big trading losses it has suffered.
The move, which allowed the bank to disguise the level of risk that the CIO was taking in its trading, could become a major focal point of investigations by the U.S. Securities and Exchange Commission and the FBI, former regulators said. It also will likely become part of investor cases in lawsuits against the bank and its executives.
When JPMorgan Chief Executive Jamie Dimon announced on May 10 that the company had lost at least $2 billion through "egregious mistakes" in trading, he also said for the first time that the bank had changed its model for measuring so-called value-at-risk in the CIO where the derivatives portfolio was managed.
The change made the CIO's portfolio, which totaled about $375 billion, appear to be a lot safer than it actually was and gave traders more leeway to make risky bets. The rest of the bank's divisions apparently kept to more conservative modeling.
The old model would have sounded alarms by showing that the CIO could lose $129 million, or more, in a day during the first quarter - a higher reading than during the financial crisis.
But the new model cut that figure almost in half, to $67 million, clouding the view inside and outside the bank of the danger it faced. That figure was lower than the $69 million reading at the end of the prior quarter.
So far, Dimon has not revealed exactly when the model was changed, or why.
Those questions now appear certain to be at the center of regulatory and shareholder inquiries into the losses, which are expected to grow. Some traders and analysts at other firms estimate the final loss tally could exceed $5 billion as the bank tries to unwind its positions. Dimon has said the losses could total $3 billion or more.
LAWSUITS ABOUT RISK
Investors have dumped JPMorgan's shares since the loss was announced, pushing them down more than 17 percent and erasing more than $27 billion of market value. Two shareholder lawsuits were filed against the company on Wednesday, accusing the bank and its management of taking excessive risk.
The SEC is investigating what happened at JPMorgan, the White House has confirmed. [ID:nL5E8GECMU] The FBI has also opened a preliminary investigation, according to agency director Robert Mueller. [ID:nL1E8GG9HX]
A JPMorgan spokesman declined to comment. Spokesmen for the SEC and FBI declined to comment.
"It is logical to expect that the SEC will look at this issue" of the disclosures, as well as why and how the new model was adopted, said Harvey Pitt, a former SEC chairman.
"Regulators are going to want to know if changes were made consistently with the obligation to operate safely and soundly," said Pitt, who is currently CEO of Kalorama Partners, a business consulting firm.
An initial report on the bank's results for the first quarter, made April 13, disclosed the $67 million figure, the reading under the new risk model. It did not say that there had been a change in models.
On May 10, as it explained the losses, the bank showed the $129 million risk reading from the old model. On a call with analysts that day, Dimon said the bank had tried the new model, and then reverted to the old one, which it had used for several years.
"There are constant changes and updates to models -- always trying to get them better than they were before," Dimon said in the May 10 conference call. "That is an ongoing procedure."
That explanation, "does not pass the smell test," said Mike Mayo, analyst at investment firm CLSA. "It is a red flag for them to change the model," said Mayo, author of "Exile on Wall Street," about the inner workings of big banks.
Banks sometimes refine their value-at-risk, or VaR, models but those commonplace changes do not by themselves produce such dramatically different results, said Christopher Finger, one of the founders of RiskMetrics Group, which pioneered VaR models and is now a unit of MSCI Inc.
The model JPMorgan put back in place shows "a huge, huge increase in risk," Finger said.
Finding out how the company decided to change the model would reveal a lot about its internal controls and about how the traders apparently got the upper hand over risk managers, said Finger.
Risk controls on traders in the CIO were eased last year without Dimon knowing, the Wall Street Journal reported on Friday, citing unidentified sources.
Traditional value-at-risk models are not a perfect predictor -- for example, they only estimate the possible losses for most days, losses could be even bigger on a few occasions. But even so, they are widely used as a metric by risk managers, traders, and investors.
Changes in such risk models usually require several layers of approval going up the management ladder, said a risk manager at a large financial company, who declined to be identified.
Mayo said it is important for investors to know who at JPMorgan made the decisions and exactly when, so they can gauge if the loss is the result of bigger problems at the bank.
"I have yet to hear an answer that makes a lot of sense," he said. The lack of transparency makes him wonder: "What else is falling through the cracks?"
(Reporting by David Henry and Jed Horowitz in New York.; Editing By Alwyn Scott, Martin Howell and Kenneth Barry)
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