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A Billion Dollar Blunder?

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JAMIE DIMON

What if you made a 1.5 billion dollar mistake and couldn't take it back? According to recently unearthed court documents, one of the world's most prestigious law firms may soon face this question, and everyone from the federal government to one of Wall Street's biggest banks wants to know the answer.

This is a story about how small errors can have big consequences. Legal filings indicate that, three years ago, the venerable law firm Simpson Thacher & Bartlett LLP accidentally gave away $1.5 billion of its clients' money, and the fact that the clients just happened to include the investment bank JP Morgan Chase makes the story all the more intriguing. Dan Rather Reports producer Adam Teicholz, poring over court documents in the public record, has uncovered for the first time that this mistake could become the biggest legal malpractice case in American history.

The story begins five years ago, hundreds of miles away from Wall Street. The Big Three automakers were struggling, even before the economy tanked. General Motors was desperate for cash and was able to get a massive loan from a group of banks, headed by JP Morgan. Wanting to protect its risky investment, the JP Morgan group staked claim to an astonishing $1.5 billion worth of the automaker's cash and property as collateral.

Fast forward to 2009, GM is heading to bankruptcy, and everyone who has done business with the company is worried about getting paid. The federal government is using TARP money to smooth the bankruptcy process and it repays JP Morgan the $1.5 billion... for the time being. It turns out that a year earlier a law firm representing GM had mistakenly filed a document saying that JP Morgan and the group of investors it headed, had given up their claim to the $1.5 billion in collateral. If a court ultimately decides that JP Morgan has technically lost claim to that money, that means the bank should never have been paid back with the TARP funds in the bankruptcy.

All this may have gone by unnoticed by anyone beyond some very nervous lawyers at JP Morgan and the firm that made the error who got together in June 2009 and wrote an affidavit saying that the $1.5 billion release had been a mistake. Except at some point before March 2010, some other eagle-eyed lawyers, seemingly led by Eric Fisher (at the time of the law firm Butzel Long, and now at Dickstein Shapiro) found the error. They were representing groups to whom GM had owed money but who were not paid after the bankruptcy, people like parts suppliers and corporate bond holders (who are known as "unsecured creditors"). They saw $1.5 billion that could be theirs and started salivating, filing claim to the money in federal court.

What this means is that, although JP Morgan is saying otherwise, the esteemed bank and the group of investors it led could be out well over a billion dollars. But this is about much more than a big bank losing big money. This is about how the bank's lawyers may have made one grandiose oversight. Because although it was a different law firm that made the initial mistake, it was Simpson Thacher who signed off on it representing their client JP Morgan ("Nice job on the documents," one Simpson Thacher lawyer wrote). And in the world of legal malpractice, who is representing whom means everything.

Founded in 1884, Simpson Thacher & Bartlett is one of New York's famed "white-shoe" firms, with a client list that reads like a who's-who of the world's most important businesses. But now this firm is in a whale of a mess and could be in the position of shutting its doors for good. That's because when a lawyer's mistake leads to his client losing money, the client can sue, and in theory, every dollar of that loss comes out of the lawyer's pocket. There is no doubt among the experts we spoke to that despite Simpson's healthy profits, a $1.5 billion judgment against it could cause the firm to shut down, fire its lawyers and liquidate its assets.

That probably won't happen; law firms have malpractice insurance, and it's not in JP Morgan's interest to shut down Simpson Thacher. Plus, the fact that this case has been pending for a long time (our earliest documents date from March, 2010) means JP Morgan, the other creditors, and the government are probably working behind the scenes to negotiate a deal. Besides, when we talked to malpractice experts Bennett Wasserman and Krishna Shah, of the law firm Davis Saperstein & Salomon, they pointed out that recent case-law lets lawyers who make mistakes reduce their liability if their client has a lot of in-house lawyers reviewing everything. Few companies have more lawyers in-house than JP Morgan -- although at this point it's unclear to what degree JP Morgan's own lawyers signed off on Simpson Thacher's oversight. Still, the details as we have them don't look good for the law firm, even though nobody thinks that there is any fraud involved, just an honest mistake.

As for whether JP Morgan is responsible for their lawyers' potentially costly screw-up even though they never meant to give up the money, bankruptcy experts we contacted said that they're probably out of luck, based on the facts as presented in our documents. The bankruptcy code is crafted with a strong bias for so-called "bright-line rules." Congress, when creating the law, wanted very much to avoid situations like the one at hand. It's in the economy's interest to get everything settled in a bankruptcy so all the debtors and lenders can know their liabilities and get on with doing business unencumbered by litigation and questions about who owns what. Once all the i's are dotted and the t's crossed, generally courts are very loathe to disturb things.

In JP Morgan's favor, though, Barry Adler, the NYU bankruptcy professor who helped us navigate the complicated world of bankruptcy, told us, "It's going to be a rare judge who says you lost 1.5 billion dollars because you checked the wrong box." Even Adler says, however, that if bankruptcy judges stick to a strict reading of the law, JP Morgan and the lenders in the group will probably be out of luck, losing their collateral and ending up back at the end of the line like all other unsecured lenders, with just pennies on the dollar for what it's owed.

So if JP Morgan is going to have to cough up, who gets the money? GM's unsecured creditors are the ones currently trying to get the court to force JP Morgan to relinquish the money. That means they clearly think it's going to them. That would normally make sense; once the creditors with collateral get their money, the leftovers go to anyone else who's owed money. This time is different, though, because the government played such a pivotal role in paying off the bankruptcy. And according to bankruptcy law, that means they are first in line to get paid back.

The unsecured creditors are afraid enough of this argument that they've filed suit to get a court to cut the government out of the picture before anybody even knows if this 1.5 billion dollars is really up for grabs.

The government refused to comment, but they gave a pretty big hint that they're after something: before we could ask anything, spokesperson for the U.S. Attorney's office for the Southern District of New York Jerika Richardson said "I assume you'd be asking about what the United States' interest in this money could be?" That sounded like an interesting question. "Sure. Yes," our reporter said. She responded that in that case, "we've spoken to the line attorneys and we're not going to be able to help out with this."

If the government does get its hands on the money, it will be quite a coup: President Obama was at a factory in Ohio earlier this month bragging about the success of the auto bailout. The administration has pointed out that the bailout, which was supposed to cost $48 billion, looks like it will only cost $14 billion. If JP Morgan and its affiliated investors have to let go of their $1.5 billion, and that money ends up going to the U.S. Treasury, the price-tag for taxpayers would drop that another 10 percent. After the last arbitration is complete and the last lawsuit concluded, who ends up paying is the biggest question of all. There is much about the outcome that is currently unknown, but these may be nervous days at one of the most world's most successful law firms.

The court documents that form the basis for this report were mostly generated by the group of investors and creditors trying to get the money from JP Morgan and the other lenders in its group. Still, the facts do not seem to be in dispute. We reached out to both JP Morgan and Simpson Thacher for comment. The law firm stopped answering our calls. JP Morgan declined to comment.

Dan Rather Reports airs Tuesdays on HDNet at 8 p.m. and 11 p.m. ET. This show is also available on iTunes.

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