SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

CMMF, LLC, )
)
Plaintiff, )
)
-vs- )
) Index No. _________
J.P. MORGAN INVESTMENT )
MANAGEMENT, INC. and TED C. )
UFFERFILGE, )
)
Defendants. )
)
)
)
)

COMPLAINT

Plaintiff CMMF, LLC (“CMMF”), by its attorneys Quinn Emanuel Urquhart Oliver &

Hedges LLP, for its Complaint against J.P. Morgan Investment Management, Inc. (“JPMorgan”)

and Ted C. Ufferfilge (“Mr. Ufferfilge”), alleges as follows:

Nature of the Case

i. CMMF, a master feeder fund created by Access Industries Group

(“Access”), hired JPMorgan to manage an enhanced cash investment

account on a discretionary basis and paid JPMorgan significant fees

for its services. JPMorgan appointed Mr. Ufferfilge to manage CM-

MF’s account. In setting up the account, CMMF clearly communic-

ated and established, among other things, conservative investment

objectives, specific diversification requirements, a low-risk 3-month

LIBOR performance benchmark, and its anticipated liquidity re-

 quirements. CMMF did so because, as JPMorgan knew, funds main-

tained in CMMF’s account were needed on short notice for various

business purposes and CMMF’s principal goal was to ensure that its

funds would be invested in ways that would preserve CMMF’s li-

quidity and principal while achieving the conservative performance

benchmark. CMMF’s benchmark and the various diversification and

other requirements applicable to JPMorgan’s management of CM-

MF’s account were set forth in an Investment Management Agree-

ment (“IMA,” attached hereto as Ex. A), as well as in a set of Invest-

ment Guidelines for Enhanced Short Term Fixed Income

(“Guidelines,” attached hereto as Ex. B), which were incorporated

into the IMA. In breach of JPMorgan’s contract with CMMF, and in

breach of JPMorgan and Mr. Ufferfilge’s duties to CMMF, JPMor-

gan and Mr. Ufferfilge implemented a series of ill-conceived invest-

ment strategies that exposed CMMF to risks well beyond those that

were reasonable in light of CMMF’s conservative objectives and

benchmark and that were inconsistent with CMMF’s liquidity re-

quirements. This action arises out of JPMorgan’s breach of its con-

tract with CMMF, and JPMorgan and Mr. Ufferfilge’s negligence

and breaches of fiduciary duty in managing CMMF’s account.

ii. As sophisticated investment advisors, JPMorgan and Mr. Ufferfilge

knew that there were a range of investments available that would

achieve CMMF’s 3-month LIBOR benchmark, as well as CMMF’s

other investment objectives. Nevertheless, despite their duty to con-

trol CMMF’s risk exposure and to ensure that CMMF’s liquidity re-

quirements could be met, and despite CMMF’s specific instructions

to not concentrate its investments in any one sector, JPMorgan and

2
 Mr. Ufferfilge made the reckless and unnecessary decision to satur-

ate CMMF’s portfolio with the riskiest and most illiquid residential

real estate securities—subprime and Alt-A loans. As JPMorgan and

Mr. Ufferfilge knew, such investments carried substantial undis-

closed risks of deterioration in value and underperformance of re-

turns, as well as substantial liquidity risks. JPMorgan and Mr. Uffer-

filge made this decision, moreover, despite the fact that market indic-

ators and JPMorgan’s own parent company recognized as early as

the fall of 2006 that the prudent reaction to the declining real estate

market was to unload residential real estate investments as quickly as

possible. JPMorgan and Mr. Ufferfilge took the opposite course with

respect to CMMF’s portfolio, and instead chose to increase CMMF’s

residential real estate exposure by continuing to purchase securities

connected to the residential real estate market through the summer of

2007. Thus, unbeknownst to CMMF, companies affiliated with JP-

Morgan were themselves simultaneously ridding their own invest-

ment portfolios of risky subprime and other mortgage-backed secur-

ities, and had begun doing so even as JPMorgan was initiating and

maintaining CMMF’s investments in these same products.

iii. In the summer of 2007, CMMF noticed significant losses in its port-

folio and began to express concern. In the fall and winter of 2007,

CMMF continued to express concern about the losses it was incur-

ring. JPMorgan and Mr. Ufferfilge repeatedly assured CMMF that

its investments were only of the highest credit quality, that the secur-

ities in its portfolio were backed by government agencies that guar-

anteed the repayment of principal in the event of default of the un-

derlying collateral, and that the securities were trading below their

3
 intrinsic value and were “money good.” JPMorgan and Mr. Uffer-

filge made these representations even though they knew, among oth-

er things, that over 50% of CMMF’s portfolio was exposed to

subprime residential real estate securities, that only two securities in

the portfolio had government agency backing, and that the ratings on

the securities JPMorgan had purchased for CMMF’s account were

inflated because the credit agencies’ evaluations lagged behind the

rapidly rising rates of mortgage defaults.

iv. The conduct of JPMorgan and its agent Mr. Ufferfilge in managing

CMMF’s portfolio fell far short of the standard of care required of

investment advisors managing a discretionary account. In negli-

gently managing CMMF’s portfolio, JPMorgan breached the terms

of the IMA and Guidelines, negligently misrepresented the credit

quality and value of the assets in CMMF’s portfolio, and flouted its

fiduciary obligations to CMMF. JPMorgan failed to manage the

fund in CMMF’s best interests and made a litany of excuses to con-

vince CMMF not to liquidate its investments and to instead ride out

the market fluctuations by maintaining its positions.

v. As a direct result of JPMorgan and Mr. Ufferfilge’s actions, CMMF

has suffered losses totaling at least $98 million.

Parties

vi. CMMF is a Delaware limited liability company. CMMF is an affili-

ate of Access, an industrial holdings company. CMMF was cre-

ated as a master feeder fund through which its members, other Ac-

cess affiliated funds, could invest their assets. CMMF’s goal was to

diversify risk and maintain liquidity in its portfolio while earning re-

turns through a conservative investment strategy.

4
vii. JPMorgan is a registered investment advisor with its principal place

of business at 270 Park Avenue, New York, New York. It is directly

or indirectly wholly-owned by JPMorgan Chase, one of the world’s

leading global financial services firms.

viii. Mr. Ufferfilge is a Managing Director of JPMorgan who, on inform-

ation and belief, maintains his principal place of business at 245 Park

Avenue, New York, New York. He was appointed by JPMorgan to

manage CMMF’s account and the relationship between JPMorgan

and CMMF with respect to the account, and was directly and person-

ally involved in all of the actions of JPMorgan with respect to the

CMMF account set forth in this Complaint.

Jurisdiction and Venue

ix. This Court has jurisdiction pursuant to New York’s general jurisdic-

tion statute, CPLR § 301. JPMorgan and Mr. Ufferfilge have offices

in New York. JPMorgan is registered and/or licensed to do business

in New York and has agreed to the jurisdiction of the New York

courts for matters arising out of its activities in New York. In addi-

tion, JPMorgan consented to the jurisdiction of this Court over con-

tractual and all other claims arising out of the activities that give rise

to the Complaint.

x. Venue is proper under CPLR § 501 because CMMF and JPMorgan

expressly agreed that the courts within the County and State of New

York are an appropriate venue for all actions arising out of the activ-

ities that give rise to the Complaint. In addition, venue is proper un-

der CPLR § 503 because CMMF, JPMorgan, and Mr. Ufferfilge

maintain their principal places of business in New York County and

5
 a substantial part of the events and omissions giving rise to CMMF’s

claims occurred in New York County.

Factual Background

I. JPMorgan Promotes Itself As An Experienced, Reputable Investment Advisor

xi. Prior to 2006, Access and its subsidiaries maintained significant

volumes of cash in interest-bearing deposit accounts at JPMorgan

Chase. In early 2006, in recognition of the fact that Access had sub-

stantial sums on deposit at JPMorgan Chase that were only partially

insured and not diversified, and in order to generate reasonable but

conservative returns while minimizing the risks to which it was ex-

posed, Access decided to consolidate certain funds, form CMMF,

and invest its money with a professional money manager in a diver-

sified enhanced cash account that would increase its diversification,

maintain low volatility of principal, and provide Access with ready

availability to the cash it needed for business ventures.

xii. When Access began the process of selecting an investment advisor to

carry out CMMF’s conservative investment objectives, it sought a

sophisticated and knowledgeable advisor with broad expertise in

structuring low-risk enhanced cash portfolios. CMMF wanted to be

a passive investor and planned to enter into an agreement that would

give its advisor complete discretion and authority to manage CM-

MF’s investments consistent with its stated conservative strategy.

CMMF understood that it would have to pay significant management

fees for such an advisor, but was willing to do so because of the im-

portance of proper management of the fund in relation to Access’s

overall business objectives.

6
xiii. In an effort to select an advisor with broad knowledge and expertise

in structuring low-risk portfolios with ready access to cash, Access

met with representatives from JPMorgan and other prominent invest-

ment management firms. In its meetings with JPMorgan, Access

emphasized that its primary investment objectives for CMMF were

capital preservation and ready liquidity. Access explained that its ul-

timate goal was to maintain stated benchmark returns and adequate

cash flows so that the portfolio could be accessed to fund invest-

ments on short notice. Access expressly advised JPMorgan that it

wanted a conservative portfolio and needed rapid liquidity. For these

reasons, Access stressed that while it planned to give its advisor

complete discretion in managing the portfolio, the portfolio had to be

diversified in order to avoid excessive exposure to any one sector of

the economy and that the credit ratings of individual investments had

to reflect high quality.

xiv. In meetings with Access, JPMorgan represented itself as a leader in

the financial services industry with “over 50 years of experience”

managing more than $780 billion. JPMorgan emphasized its experi-

ence handling short-term fixed-income funds, and its focus on put-

ting its clients’ needs first, representing that: “We believe our funda-

mental responsibility is the prudent management of each client’s

portfolio in compliance with our mutually agreed upon investment

guidelines.” JPMorgan assured Access that, if chosen, it would

structure CMMF’s portfolio to execute CMMF’s stated objectives,

and that it had over $240 billion under management for clients with

similar objectives.

7
 xv. In marketing its strengths to Access, JPMorgan described the various

levels of oversight for investments. Its promotional materials state:

JPMorgan Asset Management has established procedures and controls to help
ensure compliance with each client’s restrictions. We conduct peer review
meetings which are designed to ensure that our portfolio managers are complying
with each client’s objectives. During these reviews the performance of each
account is discussed and compliance of account structure with investment
guidelines is analyzed. The review takes the form of a comprehensive
examination of performance to establish where the investment strategy has
succeeded and failed. . . . This process helps ensure that client guidelines will not
be violated.

xvi. JPMorgan represented that every investment decision would be ana-

lyzed by a team of portfolio managers and strategy and sector spe-

cialists to ensure that no trade would be inconsistent with a fund’s

overall objectives, and that it “analyzes trade ideas before execution

to determine their impact on the overall portfolio to ensure that a

trade does not result in any unintended bets and is in keeping with

the portfolio’s overall tracking error, yield curve and duration, for

example.”

xvii. JPMorgan also represented that, in addition to its internal specialist

teams, JPMorgan employs an in-house economics team to provide

“objective analysis of current economic and political developments

that might impact our outlook and strategy,” which “draws upon the

extensive global economic research team within our affiliate com-

pany, JPMorgan Chase Bank. The economic research is an import-

ant input into our top-down strategy-setting process.”

xviii. CMMF ultimately selected JPMorgan as its investment advisor.

CMMF granted JPMorgan discretionary authority to actively manage

CMMF’s portfolio and to control risk, subject to the conservative 3-

month LIBOR performance benchmark and Guidelines specifically

8
 negotiated by CMMF for, among other things, diversification of its

portfolio through market sector allocations and credit quality re-

quirements.

II. CMMF And JPMorgan Negotiate The Terms Of The Investment Management
Agreement And Guidelines
xix. CMMF’s negotiations with JPMorgan concerning the terms of the

IMA and Guidelines that would govern CMMF’s portfolio began in

the early spring of 2006. In negotiating the terms of the IMA and

Guidelines, CMMF sought to ensure that JPMorgan would adhere to

its stated investment objective of “providing a high level of current

income consistent with low volatility of principal.” (Guidelines at 1)

In addition, the stated benchmark for returns on CMMF’s portfolio

was set at Merrill Lynch U.S. Dollar 3-month LIBOR, yet another

key indicator of CMMF’s desire to assume a low level of risk in its

portfolio. In addition to establishing CMMF’s overall objectives and

the applicable performance benchmark, the IMA included provisions

requiring diversification in CMMF’s portfolio through specific sector

limitations. The IMA also imposed specific requirements for en-

hanced credit quality on portfolio investments. These contractual

provisions were all designed to protect CMMF’s principal while al-

lowing JPMorgan to develop strategies for stable yields consistent

with the contractually established benchmark.

A. Sector Diversification, Credit Quality Requirements, And The Benchmark In

The Guidelines Ensure Low Risk For CMMF’s Investments
xx. Consistent with CMMF’s stated strategy, and to achieve its stated ob-

jective to “provide a high level of current income consistent with low

volatility of principal,” the Guidelines set the benchmark for invest-

9
 ment returns at the conservative level of Merrill Lynch U.S. Dollar

3-month LIBOR.

xxi. The Guidelines also required JPMorgan to diversify and limit the in-

vestment sectors in CMMF’s portfolio, and to adhere to credit qual-

ity standards higher than those initially proposed by JPMorgan.

xxii. The original maximum sector allocations proposed by JPMorgan in

the Guidelines permitted it to make unlimited investments in several

categories of securities, including agencies, supra-nationals, sover-

eigns, regional governments, net short-term investments, money

market instruments, and funds of one-year duration or less. In addi-

tion, and of particular concern to CMMF because it wanted to limit

its exposure to any one sector of the economy, the proposed

guidelines allowed JPMorgan to invest up to 40% of the portfolio in

mortgage-backed securities (“MBS”).

xxiii. MBS are special purpose vehicles that issue notes securitized by a

pool of mortgages owned by a trust. The cash flows from these

loans (in the form of payments of interest and principal) are used to

pay obligations on MBS notes. A purchase of MBS is thus the pur-

chase of a participation interest in the cash flows generated by a pool

of mortgages.

xxiv. The final Guidelines substantially curtailed the initial sector limits

proposed by JPMorgan, in particular setting limits on the MBS sec-

tor to reflect CMMF’s desire to diversify its portfolio investments.

The final investment sector limits in the Guidelines provided for

only 20% of the portfolio to be invested in MBS. The sector limits

reflected in the Guidelines are as follows:

10
U.S. Treasury securities 0-100%
All Agencies, Supra-nationals, Sovereigns, & Regional 0-50%
Government
Net short-term investments, money market 0-75%
instruments and funds (one-year or less duration)
Corporate securities (greater than one-year duration): 0-50%
Corporate fixed income securities
Rule 144A
Other Private Placements
Yankee securities
Eurodollar securities
Asset-backed securities 0-40%
Mortgage securities: 0-20%
Generic mortgage-backed pass-through securities
issued by GNMA, FHLMC, FNMA
Nonagency mortgage-backed securities
Collateralized Mortgage Obligations (CMOs)
Commercial Mortgage-backed securities (CMBS) 0%
U.S. and Yankee non-convertible preferreds 0%

xxv. In discussing its proposed guidelines with CMMF, JPMorgan did not

advise CMMF that JPMorgan characterized securities backed by res-

idential real estate collateral such as home equity loans or second

lien mortgages as asset-backed securities (“ABS”), or that JPMor-

gan, having agreed at CMMF’s explicit request to limit CMMF’s ex-

posure to MBS to no more than 20% of the portfolio, construed the

Guidelines to permit additional exposure to the residential real estate

market beyond the limited exposure contemplated by the 20% re-

striction on MBS. JPMorgan failed to advise CMMF of this con-

struction despite the fact that JPMorgan—as an experienced invest-

ment advisor with knowledge of the residential real estate market—

knew that MBS and ABS secured with collateral from residential

mortgages were virtually identical from a risk perspective and thus

should be considered one single “sector” for purposes of diversifying

the CMMF portfolio. Both MBS and ABS collateralized with resid-

11
 ential real estate were subject to similar risks in the residential real

estate market, including, among other things: defaults from borrow-

ers with weak credit, borrowers who qualified for real estate loans

with sparse documentation, and borrowers susceptible to increased

payments from adjustable rate mortgages.

xxvi. In addition to investment sector allocation limits, and as a further

safeguard on the security of its investments, CMMF negotiated for

heightened credit quality for individual securities in its portfolio. In-

vestors often use ratings, among other things, as a means to negotiate

for the credit quality given to securities in their portfolios. The rat-

ings provide an indication of the relative ability of an entity to meet

financial commitments, and thus the likelihood that investors will be

repaid.

xxvii. Credit ratings express risk in relative rank order. Thus, the ratings do

not predict a specific frequency of default or loss, but measure risk

relative to other types of securities on the market. “Investment

grade” ratings (International Long-term, ‘AAA’ to ‘BBB-’; Short-

term, ‘F1’ to ‘F3’) are given to securities with relatively low to mod-

erate credit risk, while those in the “speculative” or “non investment

grade” categories (International Long-term, ‘BB+’ to ‘D’; Short-

term, ‘B’ to ‘D’) indicate a higher level of credit risk or that a default

has already occurred.

xxviii. CMMF imposed a 3% total portfolio market value limit on securities

rated less than AA-/Aa3, and required JPMorgan to maintain a min-

imum average credit quality of “at least AA- or the equivalent or bet-

ter.” (Guidelines at 2) Moreover, while the initial credit guidelines

proposed by JPMorgan permitted it to purchase securities with short-

12
 term ratings of P-2, A-2, F2 or better, the Guidelines agreed to by

CMMF reflected CMMF’s more conservative investment strategy

and limited JPMorgan to purchasing securities with ratings of P-a, A-

1 or better. The final Guidelines also raised the proposed long-term

ratings limits from Baa3 to A3 or better by Moody’s and from BBB

to A- or better by Standard & Poors. CMMF negotiated to have rat-

ings provided by Fitch excluded as benchmarks.

B. The IMA Imposed Stringent Constraints On JPMorgan’s Discretionary Au-

thority As Well As Transparency Requirements
xxix. In light of the nature of the relationship it was entering into with JP-

Morgan, CMMF took the unusual step of requesting that JPMorgan

modify the terms of its form IMA to have the required standard of

care heightened. Thus, though JPMorgan’s form IMA established a

gross negligence standard of liability, the final IMA held JPMorgan

liable for acts of its mere negligence. (IMA § 14(b))

xxx. Based on CMMF’s risk aversion and desire to invest conservatively,

CMMF also negotiated for several levels of transparency in the IMA

to ensure that JPMorgan’s discretionary authority did not flout these

investment objectives. While the IMA proposed by JPMorgan only

required it to provide quarterly statements of all completed transac-

tions and lists of portfolio holdings, the IMA agreed to by CMMF re-

quired JPMorgan to provide these statements on a monthly basis.

(IMA § 7) Moreover, the Guidelines required JPMorgan to notify

CMMF if any security held in the portfolio was downgraded below

the minimum credit ratings and advise CMMF as to a recommended

course of action. (Guidelines at 3)

13
 xxxi. Any alteration or variation of the terms of the IMA or Guidelines

was required to be made in writing and signed by both JPMorgan

and CMMF. (IMA §§ 3, 22)

C. CMMF Grants JPMorgan Discretionary Authority To Manage Its Funds

Pursuant To The IMA And Guidelines
xxxii. On or about May 19, 2006, CMMF entered into the IMA with JP-

Morgan. Pursuant to the IMA and Guidelines incorporated therein,

CMMF opened a JPMorgan enhanced cash short-term fixed-income

account with an initial deposit of over $775 million in funds and ap-

pointed JPMorgan as its agent and investment manager. JPMorgan,

in turn, appointed Mr. Ufferfilge to manage CMMF’s account.

xxxiii. The IMA granted JPMorgan “full” and “complete discretion and au-

thority” over CMMF’s portfolio, allowing JPMorgan to purchase and

sell securities without first obtaining CMMF’s written consent. (IMA

¶¶ 1, 4)

xxxiv. The Guidelines defined JPMorgan’s discretionary responsibility to:

1. determine and modify strategic and tactical asset allocation among the broad
sectors of the fixed income markets given changing fundamentals and judgments
concerning relative value,

2. actively manage the duration and yield curve posture of the portfolio vis a vis
the Benchmark to enhance returns and control risk, and

3. select the most attractive individual securities within each sector.

(Guidelines at 1) (emphasis added)

xxxv. As an investment advisor with full discretionary authority, JPMorgan

willingly assumed fiduciary obligations to protect CMMF’s invest-

ments by, among other things, making tactical and strategic assess-

ments regarding asset allocation among broad sectors of the eco-

14
 nomy, reacting to changes in market fundamentals and valuations,

and in turn making appropriate adjustments to CMMF’s portfolio in

light of CMMF’s fundamentally conservative investment strategy.

These duties were reinforced by the specific investment Guidelines

incorporated in the IMA and designed to fit CMMF’s conservative

investment strategy. Thus, in executing its discretionary responsibil-

ities, JPMorgan agreed to adhere to its proposed “Enhanced Cash

Strategy,” catered to investors, like CMMF, who “do not require

daily liquidity yet seek higher returns with some preservation of

principal by employing a broader range of sectors and tactically

managing duration.” (Guidelines at 1)

xxxvi. In sum, contractual provisions of the IMA, coupled with the fidu-

ciary duties JPMorgan had as a sophisticated investment advisor to

act in the best interests of CMMF, provided CMMF with assurances

that JPMorgan would actively manage and control risk in the CMMF

portfolio to obtain the best possible returns in light of CMMF’s fun-

damentally conservative investment objectives. CMMF placed its

trust and confidence in JPMorgan, relying on it to discharge its du-

ties to monitor and manage the CMMF portfolio with competence

and utmost good faith.

xxxvii. In return, JPMorgan received annualized fees based on the aggregate

dollar value held in the CMMF portfolio at the end of each quarter,

with JPMorgan earning as much as .06% of the total amount inves-

ted so long as CMMF retained more than $500 million in the ac-

count, and .08% if JPMorgan retained between $100 million and

$500 million in the account. In total, JPMorgan earned over a mil-

15
 lion dollars in fees in return for its management of the CMMF port-

folio.

III. JPMorgan’s Knowledge Of And Response To The Subprime Mortgage Melt-

down

xxxviii. As JPMorgan knew because of its various investments, investment

management, and advisory activities, and from monitoring the resid-

ential real estate market, risks associated with subprime mortgage se-

curities became severe starting in late 2006. During this time, hous-

ing prices began to drop considerably, which led to an increased

number of defaults and foreclosures on residential mortgages, and an

enhanced risk of future foreclosures and defaults. These foreclosures

and defaults, in turn, raised red flags concerning the stability of un-

derlying mortgages in residential real estate securitizations. These

concerns became even more pronounced when, as a result of the in-

creased number of defaults and foreclosures, lenders began tighten-

ing their lax underwriting practices. As a consequence, borrowers

were unable to refinance existing mortgage loans, resulting in even

more foreclosures and defaults.

xxxix. In the fall of 2006, trends in the subprime residential real estate

mortgage market were published in numerous publicly available re-

ports concerning, among other things, the impact that the impending

burst of the housing bubble would have on residential real estate

mortgage markets, including but not limited to the following:

• On October 26, 2006, the U.S. Department of Commerce reported that the median
price for a new home sold in September was $217,100, a drop of 9.7% from
September 2005. It was the lowest median price for a new home since September
2004, and the sharpest year-over-year decline since December 1970.

16
• In November 2006, the subprime default rate soared to 10.09% from 6.62% in
2005. This default rate exceeded that recorded in November 2001, the lowest
point of the last recession.

• On December 7, 2006, it was publicly reported that HSBC Holdings (“HSBC”)

would be hurt by its exposure to controversial mortgages that helped spark the
U.S. housing boom, but which were coming up for renewal. HSBC was expected
to be the first in a long list of major residential mortgage lenders in the U.S.
forced to take a hit from the increasing number of defaults by homeowners who
could not afford to pay sharply higher interest rates. “We think the sky may be
falling,” said Mark Fitzgibbon, director of research at New York investment firm
Sandler O’Neill & Partners LP. “Credit quality has been deteriorating for two
quarters and we think the pace of deterioration will accelerate this quarter.”

• On December 14, 2006, the Mortgage Bankers Association reported in its

quarterly National Delinquency Survey that late payments and new foreclosures
on U.S. homes rose in the third quarter and were likely to flow as a massive wave
of adjustable loans to subprime borrowers before mortgage rates climbed and
predicted that between $1.1 trillion and $1.5 trillion of mortgages would face
resets in 2007.

xl. Cognizant of these market conditions, JPMorgan Chase’s CEO Jamie

Dimon (“Mr. Dimon”) set into action a plan to remove JPMorgan

Chase from these subprime market risks. Indeed, in October 2006,

Mr. Dimon telephoned William King, then chief of securitized

products at JPMorgan Chase, to inform him that the bank needed to

start selling off its positions in the subprime mortgage market. This

call “marked the beginning of a remarkable strategic shift that helped

JPMorgan Chase, virtually alone among the big diversified banks,

sidestep the worst of a historic credit crisis.” (CNNMoney.com,

September 2, 2008, “Jamie Dimon’s Swat Team: How J.P. Mor-

gan’s CEO and His Crew are Helping the Big Bank Beat the Credit

Crunch”)

xli. Accordingly, in late 2006, JPMorgan Chase began to unload its hold-

ings of subprime debt, selling more than $12 billion in subprime

17
 mortgages that it had originated. Most significantly, it began to ad-

vise its clients to sell their mortgage-related securities.

xlii. Acknowledging the impending crisis publicly at an investor confer-

ence on January 30, 2007, Mr. Dimon represented that the company

had sold off most of the mortgage loans it made in 2006 to mort-

gagors with weak credit histories. Mr. Dimon went as far as to state

that “mortgages are the one area of subprime lending where ‘we

really see something taking place that looks like a recession.’”

(Crain’s New York Business, January 30, 2007, “JPMorgan shies

from subprime mortgages”)

xliii. Signals of an impending crash in the subprime mortgage market con-

tinued during 2007, as evidenced by, among other things, public re-

ports available to experienced investment advisors such as JPMor-

gan:

• On February 2, 2007, Bloomberg reported that the subprime market was facing
record levels of collapse: Defaults on mortgages taken out by borrowers with
poor credit histories or large debt burdens rose in November above their worst
levels since the last recession in 2001. The percentage of subprime mortgages
packaged into bonds and delinquent by 90 days or more, in foreclosure or already
turned into seized properties, climbed to 10.09% from 9.08% in October.

• In early February 2007, both HSBC and New Century Financial, two of the three
biggest subprime mortgage lenders in the U.S., reported significant losses. HSBC
announced that its allowance for bad debts rose to $10.6 billion. New Century
Financial projected not only fourth quarter losses, but also that it would have to
restate its prior quarter earnings because it materially understated subprime
delinquencies and foreclosures.

• In the first quarter of 2007, the subprime mortgage delinquency rate continued to
climb to 13.77%, the highest rate since the third quarter of 2002. The delinquency
rate for residential real estate loans, as tracked by the Federal Financial
Institutions Examination Council, had reached its highest rate in 18 quarters, and
the charge-off rate on delinquent residential mortgage loans rose to a 13 quarter
high of .16%.

18
 • On April 24, 2007, the National Association of Realtors announced that sales of
existing homes fell 8.4% in March from February, the sharpest month-to-month
drop in 18 years. By May 2007, monthly foreclosure filings had surged 90% from
where they had been in May 2006.

• On June 22, 2007, Bear Sterns pledged up to $3.2 billion dollars to bail out one of
its hedge funds because of bad bets on subprime mortgages.

• On July 18, 2007, Bear Sterns announced that its two hedge funds that invested
heavily in the subprime market were essentially worthless, having lost over 90%
of their value, equal to a loss of over $1.4 billion.

xliv. JPMorgan Chase reacted to the signals in the market, and from July

2007 until the second quarter of 2008 it “took just $5 billion in losses

on high-risk CDOs and leveraged loans, compared with $33 billion

at Citi, $26 billion at Merrill Lynch, and $9 billion at Bank of Amer-

ica.” (CNNMoney.com, September 2, 2008, “Jamie Dimon’s Swat

Team: How J.P. Morgan’s CEO and His Crew Are Helping the Big

Bank Beat the Credit Crunch”)

IV. JPMorgan’s Negligent Management Of The CMMF Portfolio

xlv. In managing CMMF’s portfolio, JPMorgan was obligated to exercise

reasonable care in selecting assets in compliance with the

Guidelines. Based on the Guidelines, JPMorgan could have pursued

a range of investment strategies to achieve CMMF’s stated object-

ives of principal preservation and liquidity consistent with the con-

servative Merrill Lynch U.S. Dollar 3-month LIBOR benchmark.

By agreeing to abide by the Guidelines, JPMorgan represented that

the limitations imposed by CMMF were reasonable and enabled JP-

Morgan to achieve the benchmark while adhering to CMMF’s con-

servative investment objectives.

xlvi. To achieve returns consistent with the benchmark chosen by CMMF,

JPMorgan had numerous low risk investment options at its disposal,

19
 including but not limited to U.S. treasury bills (notes or bonds), un-

subordinated U.S. agency master notes and bonds, and U.S. corpor-

ate bonds, all listed as permissible investments in the Guidelines. In-

vestments in these securities were known at the time to be consider-

ably safer and more conservative than investments in residential

ABS and MBS because they were subject to less volatility from de-

fault credit risks and were not subject to variable prepayment option-

ality. The sector allocations in the Guidelines permitted JPMorgan

to invest up to 100% of the portfolio in U.S. treasury bills, up to 50%

in U.S. agencies, and up to 50% in corporate bonds.

xlvii. JPMorgan could also have invested in agency collateralized mort-

gage obligations (“CMOs”), a sub-category of MBS, which were far

safer than residential ABS and non-agency CMOs due to the govern-

ment’s guarantee of repayment in the event of defaults on the under-

lying mortgage collateralizations.

xlviii. However, rather than comply with CMMF’s stated desire to diversify

among “broad sectors” and stratify its investments among a variety

of low risk investments, JPMorgan instead saturated the CMMF

portfolio with volatile subprime residential real estate securities.

xlix. Further, despite the fact that its own parent company, JPMorgan

Chase, recognized the unfolding mortgage crisis and substantially

exited the subprime residential real estate market beginning in Janu-

ary 2007, JPMorgan took no affirmative steps to reallocate the

CMMF portfolio in early 2007 to account for the subprime crisis.

Remarkably, JPMorgan instead advised CMMF to hold its positions,

and in early 2007 even suggested that CMMF modify the Guidelines

to increase its exposure to the subprime residential real estate market

20
 as a way of increasing returns. CMMF rejected this suggestion be-

cause it did not want to assume any principal risk.

A. JPMorgan’s Failure To Diversify The CMMF Portfolio

l. JPMorgan had contractual and fiduciary obligations to select invest-

ments that would achieve the benchmark return provided in the

Guidelines while adhering to CMMF’s conservative investment

strategy and sector diversification requirements. In initially selecting

investments for CMMF’s portfolio that were far riskier than neces-

sary to achieve the stated Merrill Lynch 3-month LIBOR benchmark,

JPMorgan exposed CMMF to unnecessary risk, flouted sector

guidelines, and ultimately found it impossible to unload the residen-

tial mortgage securities it had saturated the CMMF portfolio with

from the outset.

li. CMMF’s exposure to the subprime residential real estate market

meltdown was not immediately evident to CMMF. The daily and

monthly reports supplied by JPMorgan reflected that CMMF’s port-

folio was healthy and yielding positive returns, although those re-

turns were slightly lower than expected. Based on this information,

between May 2006 and May 2007 CMMF continued to deposit large

sums of cash into its portfolio.

lii. However, during this timeframe, JPMorgan knew, or should have

known, that despite these temporary positive returns, its decision to

saturate CMMF’s portfolio with securities exposed to volatility in the

residential real estate market would subject the portfolio to substan-

tial losses. Indeed, by January 31, 2007—the time by which JPMor-

gan Chase and market indicators recognized the magnitude of the

21
 impending subprime residential real estate market meltdown—JP-

Morgan had already allocated over 23% of CMMF’s portfolio to

risky residential real estate securities. As a result, JPMorgan’s unne-

cessary speculation caused it to breach the 20% MBS sector limit in

the Guidelines no later than January 2007.

liii. Between January 2007 and July 2007, the percentage of the portfolio

that JPMorgan allocated to these securities surged from 23% in Janu-

ary to over 46% by the end of July. Remarkably, rather than unload-
ing risky residential mortgage securities during this time, JPMorgan

instead chose to increase CMMF’s residential real estate market ex-

posure by continuing to purchase even more securities connected to

the residential real estate market throughout the spring of 2007. In

contrast, JPMorgan Chase significantly reduced its exposure to these

securities in its proprietary trading.

liv. The CMMF portfolio did not begin to show substantial losses until

July 2007, when it lost over $2.1 million in value, mostly from se-

curities collateralized by residential mortgages.

lv. In response to the volatility in the portfolio, CMMF contacted JP-

Morgan in August 2007 to discuss potential options. From that point

onward, Access’s Chief Financial Officer, Rich Storey (“Mr.

Storey”), was in constant contact with Mr. Ufferfilge, who JPMorgan

held out as an expert in investment management. Mr. Ufferfilge

provided constant assurances to CMMF that its investments were se-

cure despite his awareness of the degrading value of those securities.

lvi. In an August 14, 2007 email, Mr. Ufferfilge stated that JPMorgan

“do[es] not recommend selling at this time. . . . Our research team

still is extremely confident that AAA Home Equity asset-backed se-

22
 curities are money good, meaning that over time you will get the en-

tire amount of your principal back. In order for an investor to exper-

ience principal loss in a AAA tranche you would need default rates

(not delinquency rates) to rise to 50% from 14.5% where they are

today and home recovery value to drop to 60% of initial price.”

lvii. CMMF responded by requesting that JPMorgan sell any question-

able residential real estate securities as quickly as possible to avoid

further loss. In response to the August 14th email, Access’s CEO

Lincoln Benet (“Mr. Benet”) wrote: “I understand your point on the

AAA’s for Home Equity, but anything you can do to get out of those

you think are even slightly ‘cuspy’ would be great. It could get

worse before it turns around . . . .” Notably, CMMF’s proposed ac-

tions were wholly in line with JPMorgan Chase’s subprime residen-

tial real estate exit strategy—get out as quickly as possible—yet Mr.

Ufferfilge, the expert advisor chosen by JPMorgan to oversee the

CMMF portfolio, not only urged CMMF to weather the storm and

maintain these positions, but took no affirmative steps to make

meaningful adjustments to CMMF’s portfolio.

lviii. In response to further inquiries from CMMF in September 2007, JP-

Morgan echoed the same advice, stating yet again in a September 20,

2007 email to Mr. Storey that JPMorgan believed that AAA-rated se-

curities backed by residential home equity loans would ultimately be

“money good.”

lix. The same pattern and practice of CMMF raising its concerns to JP-

Morgan, only to be reassured by its expert advisor that its invest-

ments were stable, continued throughout the months of October 2007

through December 2007:

23
• In an October 11, 2007 email, Mr. Storey questioned Mr. Ufferfilge about
liquidating the entire portfolio, and Mr. Ufferfilge advised him that it would be
better to wait.

• In a November 12, 2007 email, Mr. Storey expressed concern that the market was
the worse it had been and asked Mr. Ufferfilge if it would get worse. Mr.
Ufferfilge responded that it was JPMorgan’s call that the market would come
back.

• On November 16, 2007, CMMF found itself unable to withdraw the cash it
needed, and was told by JPMorgan that it would sustain losses if it attempted to
withdraw additional funds.

• In early December, CMMF considered liquidating the entire CMMF account, and
was told by JPMorgan that if that were done, they would only get “70-75% of the
value of the portfolio.” However, on December 5th, Mr. Ufferfilge informed
CMMF that they would not even be able to sell the AAA-rated home equity
securities in its account.

lx. Thus, as of December 2007, CMMF was locked into a set of

subprime residential real estate investments that it never needed to

be exposed to in the first instance to achieve its 3-month LIBOR

benchmark.

lxi. In January and February 2008, CMMF continued to seek solutions to

its liquidity problem, but was offered no guidance from JPMorgan

except to hold onto the portfolio and wait for the Federal Reserve to

lower interest rates in the hopes that the decline in asset values

would stop.

lxii. As the subprime mortgage crisis continued to unfold in March and

April of 2008, JPMorgan offered no concrete solutions to CMMF,

and when JPMorgan tried to sell parts of the CMMF portfolio, it was

unsuccessful. CMMF’s portfolio value plummeted, and by April 30,

2008, it had sustained a net loss of over $106 million, $98 million of

which was a result of investments in residential real estate securities.

In contrast, comparable funds with similar investment objectives and

24
 benchmarks to CMMF, but which were invested in substantially

lower concentrations of residential real estate securities, performed

positively between May 2006 and April 2008.

B. JPMorgan’s Failure To Adhere To Credit Quality Requirements

lxiii. Not only did JPMorgan unnecessarily saturate CMMF’s portfolio

with residential real estate securities, negating the benefits of portfo-

lio diversification and unnecessarily subjecting the portfolio to volat-

ility in the residential real estate market, but it further exacerbated

CMMF’s risk exposure at the individual security level by ignoring

the credit quality requirements set forth in the Guidelines and choos-

ing the most volatile, least liquid residential real estate securities

available on the market—subprime and Alt-A loans. Remarkably,

JPMorgan chose these securities despite the fact that it knew that

they represented substantially more risk, and thus were more sus-

ceptible to credit quality fluctuations than widely used alternatives

such as prime loans or agency-guaranteed securities. JPMorgan nev-

er disclosed the risks associated with investing in these securities to

CMMF.

lxiv. Credit quality ratings of securitizations are based on characteristics

of assets underlying an individual security. Thus, because mortgages

and home equity loans are the only collateral supporting residential

ABS and MBS, their credit quality is of critical importance to resid-

ential ABS or MBS note holders.

lxv. Prime or agency-backed MBS are typically given high credit ratings

because agencies require mortgages to conform to a relatively nar-

row set of lending specifications and cater to good borrowers with

25
 complete mortgage loan documentation. Government agency

backed mortgage securitizations guarantee the timely repayment of

principal investments, and are thus considered to be of relatively

high credit quality.

lxvi. Non-agency MBS, on the other hand, consist of mortgage loans that

do not conform to government agency guidelines. The level of cred-

it quality for these securities is reflected in their “tranche” ratings,

indicating the priority of repayment to the investor in the instance of

default on the underlying mortgage. The top tranches, the AAA and

AA-rated bonds, are those with the lowest risk and least likelihood

of default, and the super-senior tranches reflect the highest level of

credit quality.

lxvii. From the outset, a significant portion of the securities in CMMF’s

portfolio consisted of subprime non-agency backed CMOs and ABS

secured with second-lien residential mortgages or home equity loans

with AAA credit ratings.

lxviii. Despite these AAA credit ratings, at least as early as fall 2006, JP-

Morgan, as a sophisticated investment manager with exposure to the

subprime market and the ratings process, became aware that CM-

MF’s investments in residential ABS and MBS were far riskier than

implied by the nominal AAA-ratings because the underlying collat-

eral was subject to sharply declining mortgage default and delin-

quency rates.

lxix. As JPMorgan was aware, the rating agencies began warning about

the state of the residential housing market beginning in 2006.

Moody’s first took action in downgrading 2006 vintage subprime

loans in November of 2006, and in February 2007, Standard & Poors

26
 followed suit, placing subprime transactions “on watch” for down-

grade.

lxx. Throughout the spring and summer of 2007, the rating agencies re-

sponded to the soaring default and delinquency rates by downgrad-

ing many AAA-rated securities, with half of all subprime ABS

downgrades made in the first seven months of 2007. The first week

of July 2007 began the tumultuous downturn in the subprime market

when Moody’s downgraded 399 tranches of subprime ABS during

that one week alone.

lxxi. In August of 2007, Bloomberg reported on this phenomenon, ex-

plaining that “the rating companies are sifting through the billions of

dollars of repackaged bonds and structured investment funds they

graded in recent years. . . . Last week, for example, Moody’s sum-

marized ‘the most recent refinements’ in how it treats bonds backed

by so-called Alternative-A mortgages. ‘In aggregate, the change in

our loss estimates is projected to range from an increase of approx-

imately 10 percent for strong Alt-A pools to an increase of more than

100 percent for weak Alt-A pools.’”

lxxii. Thus, JPMorgan knew that the credit quality of the underlying assets

in the CMMF portfolio was far less stable than it appeared due to rat-

ings lag. As a result of this ratings lag, JPMorgan understood that it

should look beneath the nominal ratings to determine the actual risk

associated with the residential ABS and non-agency CMOs in CM-

MF’s portfolio as JPMorgan Chase did for its own portfolio.

lxxiii. Indeed, examining the characteristics of these securities—such as

whether the underlying mortgage collateral had adjustable rates,

whether the borrowers needed to provide full documentation, wheth-

27
 er the borrowers had high credit or “FICO” scores, and the state in

which the mortgages were issued—reveals that the mortgage collat-

eral for both the residential real estate ABS and non-agency CMOs

in the CMMF portfolio were distinctly subprime and thus predis-

posed to downgrades in credit quality. The residential real estate

ABS in the portfolio were skewed towards adjustable rate mortgages

and low FICO scores, while the non-agency CMOs in the portfolio

consisted of all adjustable rate mortgages with the vast majority be-
ing interest only loans.

lxxiv. Thus, JPMorgan knew that despite the high credit ratings of the res-

idential ABS and non-agency CMOs in CMMF’s portfolio, it would

have been far more prudent given CMMF’s investment objectives to

take a less aggressive approach and purchase less volatile securities.

Indeed, even within the residential real estate sector, JPMorgan could

have mitigated risk for CMMF simply by purchasing all agency

CMOs—securities guaranteed by the U.S. government—rather than

investing CMMF’s portfolio so heavily in non-agency CMOs and

residential ABS. Indeed, while agency CMOs gained over 13% in

value during the period that JPMorgan managed CMMF’s portfolio,

residential ABS, which accounted for a significant portion of CM-

MF’s portfolio, lost over 21%. Thus, CMMF’s losses stem directly

from JPMorgan’s negligent decision to invest in these underperform-

ing, illiquid securities.

lxxv. In contrast, while CMMF suffered severe negative returns between

November 2007 and March 2008 as a result of its concentration in

residential mortgage securities, comparable funds with similar

benchmarks and liquidity objectives that performed significantly bet-

28
 ter than CMMF did so because these funds were invested in substan-

tially lower percentages of residential mortgage securities. Indeed,

to the extent these comparable funds invested in residential mortgage

securities at all, such investments were in agency backed securities

that were guaranteed by the government in the event of default.

V. JPMorgan’s Negligent Misrepresentations

lxxvi. CMMF relied on JPMorgan to provide it with accurate and consist-

ent information about the type and value of its investments. Despite

JPMorgan’s fiduciary and contractual obligations to do so, it failed to

provide CMMF with accurate information about significant aspects

of its portfolio, including the value and credit quality of collateral

underlying its residential real estate securities. As a result, JPMor-

gan misled CMMF into believing that JPMorgan was adhering to the

terms of the IMA and Guidelines, and that the value of CMMF’s in-

vestments were the values reflected in its daily and monthly state-

ments.

lxxvii. CMMF relied on the daily and monthly statements sent by Mr.

Ufferfilge from JPMorgan to assess the performance of its portfolio,

yet these statements failed to provide basic information that would

have informed CMMF that JPMorgan’s investments were not in

compliance with the Guidelines and were subject to far greater risk

than that bargained for by CMMF. The statements did not differenti-

ate between the subtypes of ABS purchased by JPMorgan, meaning

that CMMF could not have reasonably been expected to have known

that JPMorgan’s ABS investments were highly concentrated in resid-

29
 ential real estate securitizations, as opposed to ABS investments

backed by auto loans, credit cards, and student loans.

lxxviii. The daily and monthly statements also failed to differentiate between

agency and non-agency backed securitizations. Consequently, the

statements, which were intended to provide transparency to CMMF

in light of JPMorgan’s unfettered discretionary authority, forced

CMMF to rely on JPMorgan’s oral and written representations re-

garding the credit quality of the ABS and MBS in its portfolio.
lxxix. Significantly, at the end of December 2007, following nearly two

years of CMMF’s reliance on daily reports conveying the net worth

of its portfolio, Mr. Ufferfilge admitted to CMMF that JPMorgan’s

on-line daily summaries were “misleading,” and that JPMorgan

planned to update the way its customers could access these “weak”

online statements in 2008.

A. Agency Misrepresentations
lxxx. In addition to misleading CMMF about the true value and nature of

its portfolio in daily and monthly statements, JPMorgan misrepresen-

ted the types of CMOs in CMMF’s portfolio by repeatedly informing

CMMF that 100% of the CMOs in its portfolio were government

agency securitizations, meaning that as a result of government guar-

antees CMMF’s investments would be repaid in full in the event of

defaults on the underlying mortgages collateralizing the CMOs.

lxxxi. Remarkably, JPMorgan’s representations were so inaccurate that

only 2 of the 52 CMOs held in CMMF’s portfolio as of December

2007 were agency-backed. Moreover, the likelihood of repayment

for the other 51 non-agency CMOs, which constituted over 31% of

30
 the portfolio, depended on the credit worthiness of the underlying

collateral, which JPMorgan represented to CMMF, as discussed be-

low, was of much higher quality than it was in reality. As a result,

the CMO investments in CMMF’s portfolio were far riskier than

CMMF was led to believe.

lxxxii. JPMorgan’s misrepresentations regarding the agency backing of

CMOs in CMMF’s portfolio began at least as early as August 2007

when CMMF began to contact JPMorgan regarding the losses in its

portfolio. At the beginning of August, when CMMF personnel con-

veyed their concerns about the losses to Mr. Ufferfilge, they were re-

assured that the portfolio would be safe because all the CMOs in the

portfolio were backed by government agencies. Mr. Ufferfilge con-

tinued to make these representations to CMMF throughout the fall of

2007.

lxxxiii. In mid-December 2007, Mr. Ufferfilge again informed CMMF that

the CMOs were agency backed: “The underlying credit on the cmo’s

[sic] is that of fannie and freddie. They are guaranteeing the timely

payment of principal and interest.”

lxxxiv. In a December 15, 2007 email from Mr. Benet to Jarred Sherman,

JPMorgan’s lead portfolio manager on the CMMF account, Mr. Ben-

et noted that “[CMMF was] still confused. If the underlying credit

on our cmo’s [sic] is fannie and freddie, where they guarantee the

timely payment of principal and interest, then we are trying to under-

stand the credit risk that we have from the underlying mortgages ex-

tending.” In response, Mr. Ufferfilge provided the following explan-

ations in an email dated December 17, 2007, again designed to alle-

viate CMMF’s fears:

31
For the Agency CMO’s [sic] owned in the portfolio the credit risk is that of
Fannie/Freddie. The agencies are guaranteeing the timely payment of principal
and interest. . . . In a case where the underlying mortgage holder defaults,
Fannie/Freddie will buyout the loan from the pool and return remaining principal
due to the security holder(s).

For the non-agency backed CMO’s [sic] the credit risk is the quality of the
underlying mortgage holders . . . and the over collateralization of the tranche
owned. In this case we only own the super senior tranches, which are on average
40% over collateralized. This translates that you will need approximately 70% of
the underlying mortgage holders to default before you the super senior tranche
owner to [sic] have principal risk.

lxxxv. Later that same day, CMMF asked Mr. Ufferfilge for a percentage

breakdown of agency guaranteed versus non-agency guaranteed

CMOs in the portfolio, explaining that Mr. Ufferfilge had represen-

ted in August 2007 that all the underlying mortgages for the CMOs

were guaranteed by government agencies.

lxxxvi. On December 17, 2007, for the first time, and following months of

representations to the contrary, Mr. Ufferfilge admitted to CMMF

that the “majority of the CMO’s [sic] owned by the CMMF [were]

non-agency.” In fact, only two CMOs were agency securitizations,

accounting for only $9 million, or just over 1%, of the entire portfo-

lio.

lxxxvii. Indeed, Mr. Ufferfilge, realizing that he had misrepresented the

nature of the risk associated with the CMOs, apologized the next day

to CMMF for “not communicat[ing] clearly the type of mortgage po-

sitions owned in the CMMF, LLC portfolio.”

B. Ratings Misrepresentations
lxxxviii. JPMorgan also repeatedly misrepresented the credit quality of the

collateral underlying the securities in CMMF’s portfolio and failed to

inform CMMF of credit quality downgrades as required by the IMA.

32
 Between May 2006 and April 2008, each monthly statement repres-

ented that all ABS and MBS were AAA-rated. CMMF relied on JP-

Morgan’s repeated representations in the monthly statements that

these securities were AAA-rated as an indicator of their credit wor-

thiness. JPMorgan knew, or should have known, of the ratings lag

attached to AAA-rated subprime securities. As a result, JPMorgan

knew or should have known that providing assurances to CMMF

based on the AAA-ratings of its ABS and MBS without disclosing

the ratings lag was disingenuous.

lxxxix. Nevertheless, JPMorgan disregarded ratings warnings and made re-

peated representations to CMMF starting in August 2007 that it need

not worry about the credit risks attached to its securities because they

had all retained their AAA-ratings.

xc. Further, despite JPMorgan’s awareness that housing default rates

were at historically high levels, and worsening, Mr. Ufferfilge com-

mented on the stability of the CMMF portfolio in an August 20, 2007

email to Mr. Benet, stating that “[d]efault rates and recovery values

would have to be dramatically bad to effect the AAA tranches.”

xci. Mr. Ufferfilge made similar representations about the residential real

estate securities’ AAA-ratings throughout the fall and winter of 2007.

In September 2007, Mr. Ufferfilge represented that the ratings agen-

cies had not yet downgraded any of the AAA-rated ABS. Again in

late October 2007, while acknowledging that the “rating agencies

have started taking aggressive action to all mortgage related

products,” he reassured CMMF that its investments were protected

because “all the home equity asset-backed and mortgage-backed se-

curities held in CMMF have retained their AAA ratings to date.” At

33
 the end of November, Mr. Ufferfilge again reassured CMMF that

“[a]ll CMO’s [sic] and ABS securities in the CMMF, LLC portfolio

remain AAA rated and not on watch.”

xcii. As late as December 2007, JPMorgan continued to make representa-

tions concerning the AAA-ratings. In response to a request by CM-

MF’s financial officers for a detailed summary of how JPMorgan

evaluated risks for CMOs, Mr. Sherman forwarded CMMF a chart

listing all CMOs in its portfolio, which reflected that the CMOs had
all retained their AAA-ratings.

xciii. This chart was misleading because, while the CMOs had not yet

been downgraded by the ratings agencies, the underlying mortgages

were continuing to decline in value because, as explained below,

they were undercollateralized from origination, and further credit en-

hancements were stymied by the declining housing market. JPMor-

gan knew CMMF was relying on this information to assess what ac-

tions to take with the funds in its portfolio.

C. Collateralization Misrepresentations
xciv. JPMorgan and Mr. Ufferfilge also misrepresented that JPMorgan had

purchased only “super-senior tranches” of collateral, meaning that

CMMF’s investments were protected by the subordination of lower

tranches of collateral, including AAA-rated senior tranches. This

representation was woefully inaccurate because none of the residen-

tial ABS and less than half of all the CMOs were the super-senior

tranches, and therefore the securities lacked adequate subordinate

protection.

34
 xcv. Indeed, despite representations that on average the residential real

estate securities in CMMF’s portfolio were 40% overcollateralized

on a notional basis, in reality most of the ABS and MBS were only

2% overcollateralized from their date of origination.

xcvi. The amount of collateralization in securitizations is important be-

cause it impacts the credit quality of the securitizations. A given

tranche in a securitization is overcollateralized if there is more col-

lateral, on a notional basis, than the principal amount of that tranche.

If, as of the maturity date, losses to the collateral principal do not ex-

ceed the amount of overcollateralization, and cash flows have not

otherwise been diverted, then the principal amount of the notes in the

tranche may be repaid in full.

xcvii. Information regarding the collateralization of residential real estate

securities in CMMF’s portfolio was available to JPMorgan in the

prospectuses published for the ABS and MBS securities it purchased.

JPMorgan, as a sophisticated investment advisor, was aware of the

impact that volatility in the residential real estate market had on col-

lateralization, and thus the credit quality, of residential real estate se-

curities.

xcviii. Nevertheless, in response to concerns from CMMF in the summer of

2007 regarding credit quality, Mr. Ufferfilge misrepresented the

quality of the collateral, indicating that the CMMF portfolio only

held first lien mortgages which were 20% overcollateralized. Mr.

Ufferfilge continued to misrepresent the quality of the collateral un-

derlying the CMOs throughout the fall and winter.

xcix. On November 26, 2007, Mr. Ufferfilge explained that “[t]he CMO’s

[sic] owned in the CMMF, LLC portfolio have an average overcol-

35
 lateralization of 40%. We have only bought the super senior tranche

. . . .”

c. In mid-December 2007, Mr. Ufferfilge again represented that: “The

cmo’s [sic] owned in the portfolio are all super senior tranche.

Meaning that th[e] average over collateralization on these securities

is 40%. I do not view these securities as having meaningful credit

risk . . . .” Indeed, later that week Mr. Sherman bolstered Mr. Uffer-

filge’s misrepresentations, stating that JPMorgan “only purchase[s]

the highest or most senior tranche in these cmo deals from a credit

perspective. In most cases this means the super senior tranche.”

ci. Thus, while JPMorgan touted the credit quality of the residential real

estate securities held in the CMMF portfolio for months, assuring

CMMF that they would be “money good” because they were all

AAA-rated, senior tranche, and overcollateralized, the values of

these securities continued to decline, resulting in significant losses

for CMMF.

D. Pricing Misrepresentations
cii. The monthly statements also provided misleading pricing informa-

tion, which ultimately affected CMMF’s understanding of the net

worth of the entire portfolio.

ciii. On information and belief, by February or March 2007, JPMorgan

had information indicating that securities in the CMMF portfolio

could not be liquidated in the short term at prices equal to the book

value because, among other things, buy-side and sell-side valuations

diverged. In addition, starting as early as the summer of 2007, JP-

Morgan became aware that the pricing service it used, the Interactive

36
 Data Corporation (“IDC”), was experiencing problems in accurately

pricing ABS and MBS due to the mortgage crisis. As a result, pri-

cing of securities in CMMF’s portfolio did not reflect the reality of

trading on the market.

civ. The ability of a pricing service to provide accurate pricing data is

linked to the liquidity of the market. As liquidity declines, sale

prices for securities are subject to “haircuts,” a percentage deduction

that is subtracted from the par value of the assets being used as
collateral. The size of the haircut, or the loss that will be incurred

upon a sale, reflects the perceived risk associated with holding the

assets.

cv. Despite recognizing that securities in CMMF’s portfolio would ex-

perience haircuts in the event that CMMF tried to sell its ABS and

MBS positions, JPMorgan never informed CMMF that IDC pricing

did not account for haircuts.

cvi. CMMF relied upon information provided in the daily and monthly

statements in assessing the health of its investments and in deciding

whether to heed JPMorgan’s advice. The net overall value of the

portfolio on a short-term basis was one of CMMF’s primary con-

cerns. Thus, when JPMorgan provided valuations of securities based

on IDC pricing in the daily and monthly statements that did not ac-

count for haircuts, it misled CMMF as to the actual value of its in-

vestments and the ability of the portfolio to meet CMMF’s short-

term liquidity objectives.

cvii. Based on IDC pricing, in late September 2007 Mr. Ufferfilge misrep-

resented to CMMF that he would be able to raise approximately

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 $550 million in liquidity for CMMF without realizing any net losses

by the end of 2007.

cviii. In an email dated October 15, 2007, Mr. Ufferfilge provided IDC

pricing for two securities he hoped to sell for the CMMF, while at

the same time acknowledging that the IDC pricing was “not indicat-

ive of where we could actually execute the sales.”

cix. In an email dated November 30, 2007, Mr. Ufferfilge downplayed

the significance of IDC pricing on ABS and MBS when he acknow-

ledged that IDC had lowered the prices for these securities, but that it

had not affected the value of the securities because they “remain[ed]

AAA rated by the rating agencies.” Mr. Ufferfilge further provided

an example to show that the CMMF securities remained insulated by

the effects of IDC pricing: “The market remains extremely thinly

traded which has exacerbated the pricing services [sic] actions. As

an example the Countrywide bond in the portfolio is marked at

73.204 yet I have a bid at $79.”

cx. In that same email, Mr. Ufferfilge forwarded CMMF a daily sum-

mary report and noted that “[t]he pricing service has taken severe ac-

tion in marking down the home equity asset-backed securities in the

portfolio.” As a result, CMMF learned that the pricing models JP-

Morgan had been using to value the ABS and MBS were inaccurate,

reflecting a $13M loss in the portfolio from the pricing service ad-

justment alone.

cxi. By mid-December 2007, CMMF requested that Mr. Ufferfilge

provide more “transparency on the pricing.” One of CMMF’s finan-

cial officers explained that they relied heavily on the pricing

provided by JPMorgan: “As a manager of over $200bn of such

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 funds, I’d expect you to have a good insight on prices that would be

communicated to investors to understand the value of what you are

managing--especially when it deviates so much now from par.”

cxii. In response, Mr. Ufferfilge conceded that the pricing was inaccurate.

“Pricing in this market place is extreme[l]y difficult. The best trans-

parency anyone can provide is to put the portfolio out for the bid.”

cxiii. Mr. Ufferfilge continued to send monthly statements indicating IDC

pricing for the securities until the end of January 2008, when for the
first time he forwarded CMMF a portfolio holdings report from

December 3, 2007 that he had updated with broker indicated pricing.

At the time this report was originally sent to CMMF in early Decem-

ber, Mr. Ufferfilge informed CMMF that the maximum difference

between the losses sustained by the CMMF portfolio as measured by

IDC pricing as compared to broker pricing was $5M. However, the

updated report sent at the end of January 2008 revealed to CMMF

for the first time that the daily statements upon which it relied and

the broker indicated pricing reflected a $24 million discrepancy in

the total losses sustained by the portfolio.

FIRST CLAIM FOR RELIEF

(Breach of Contract against JPMorgan)

cxiv. Paragraphs 1 to 113 are incorporated as if fully set forth herein.

cxv. On or about May 19, 2006, CMMF entered into the IMA with JP-

Morgan, by which it vested complete discretionary authority in JP-

Morgan to manage its investments consistent with the conservative

strategy reflected in the Guidelines.

cxvi. Under the terms of the IMA and Guidelines, JPMorgan was required

to properly diversify the CMMF portfolio in order to achieve CM-

39
 MF’s stated objective of maintaining “a high level of current income

consistent with low volatility of principal.” In achieving this goal,

JPMorgan was required to adhere to the conservative benchmark of

Merrill Lynch 3-month LIBOR chosen by CMMF. JPMorgan also

agreed to adhere to high credit quality ratings in order to reduce the

overall risk profile of CMMF’s portfolio, and to “select the most at-

tractive individual securities within each sector.” The Guidelines re-

quired JPMorgan to “actively manage the duration and yield curve

posture of the portfolio vis a vis the Benchmark to enhance returns

and control risk,” and in the event that any of the investments made

by JPMorgan fell out of compliance with the Guidelines, it was re-

quired to recommend a course of action taking into account the real-

ities of the marketplace.

cxvii. The IMA also required JPMorgan to provide CMMF with accurate

daily and monthly statements reflecting the value of the CMMF port-

folio and the credit quality of its investments.

cxviii. From the outset, JPMorgan materially breached the IMA and

Guidelines by saturating the CMMF portfolio with some of the riski-

est and most illiquid securities available on the market: non-agency

CMOs and residential ABS. With knowledge that MBS and ABS se-

cured by collateral from residential mortgages were virtually identic-

al from a risk perspective, JPMorgan breached the diversification re-

quirements and sector limits of the Guidelines by saturating the port-

folio with securities backed by residential real estate collateral.

cxix. JPMorgan further materially breached the IMA and Guidelines by

failing to actively manage the portfolio, and by failing at any point to

recommend a course of action that would have decreased CMMF’s

40
 exposure to the volatile residential real estate market, which risks

were known to JPMorgan’s parent company as early as the fall of

2006.

cxx. JPMorgan also materially breached the credit quality limits set forth

in the Guidelines when it failed to sell securities with credit quality

and risk profiles lower than that bargained for by CMMF, and in-

stead continued to purchase additional positions with the same risks,

even after it became aware that AAA-ratings were subject to ratings

lag, and that the lack of collateralization and super senior tranching

of the securities would leave CMMF’s principal investments unpro-

tected in an environment of rising mortgage default and delinquency

rates.

cxxi. Finally, JPMorgan’s daily and monthly statements failed to provide

accurate information regarding the present value of CMMF’s portfo-

lio and the risks associated with the securities therein. This lack of

transparency was yet another material breach of the IMA.

cxxii. These breaches, which continued from as early as May 2006 through

April 2008 when CMMF terminated its relationship with JPMorgan,

forced CMMF to assume risks that were materially greater than it

had bargained for and grossly out of proportion with its conservative

portfolio goals. As a direct and proximate result of JPMorgan’s

breaches, CMMF has been damaged in an amount to be proved at tri-

al, but not less than $98 million.

SECOND CLAIM FOR RELIEF

(Negligence against JPMorgan and Mr. Ufferfilge)

cxxiii. Paragraphs 1 to 122 are incorporated as if fully set forth herein.

41
cxxiv. Having been vested with unfettered discretionary authority over CM-

MF’s portfolio, subject only to the limitations imposed by the

Guidelines, JPMorgan and Mr. Ufferfilge had a duty to actively man-

age CMMF’s portfolio in a manner consistent with the superior

knowledge and expertise of sophisticated investment advisors. This

required JPMorgan and Mr. Ufferfilge to manage CMMF’s funds

with reasonable care and in the best interests of CMMF.

cxxv. JPMorgan and Mr. Ufferfilge breached this duty of care in multiple
respects. JPMorgan and Mr. Ufferfilge were aware that CMMF’s

primary objectives were to maintain a consistent flow of cash

through the purchase of liquid securities so that it could redeem

funds for its business ventures, and to preserve its principal invest-

ments. However, from the outset their management of CMMF’s

portfolio was negligent. Rather than being diversified by spreading

and allocating risk amongst different sectors of the market, CMMF’s

portfolio was saturated with volatile residential real estate securities

— investments far riskier than necessary to achieve the conservative

benchmark of Merrill Lynch 3-month LIBOR set forth in the

Guidelines.

cxxvi. At the individual security level, JPMorgan and Mr. Ufferfilge were

fully aware that investments in residential real estate ABS and non-

agency CMOs lacking super-senior tranching represented the riskiest

investments, and such investments were contrary to CMMF’s object-

ives and were unnecessary to achieve CMMF’s conservative 3 month

LIBOR benchmark. By continuing to purchase these residential real

estate securities through the summer of 2007, JPMorgan and Mr.

Ufferfilge negligently placed CMMF in a position of realizing sub-

42
 stantial losses were it to sell any of these securities. As a result,

CMMF incurred a substantial loss.

cxxvii. As a direct and proximate result of JPMorgan’s and Mr. Ufferfilge’s

breaches of their duty of care as sophisticated financial advisors,

CMMF has suffered damages in an amount to be determined at trial,

but not less than $98 million.

THIRD CLAIM FOR RELIEF

(Breach of Fiduciary Duty against JPMorgan and Mr. Ufferfilge)

cxxviii. Paragraphs 1 to 127 are incorporated as if fully set forth herein.

cxxix. At all relevant times, JPMorgan and Mr. Ufferfilge, as sophisticated

investment advisors vested with complete discretionary authority

over CMMF’s portfolio, owed fiduciary duties of loyalty, care, hon-

esty, good faith, and trust to CMMF. JPMorgan and Mr. Ufferfilge

were aware that CMMF was entirely dependent on them to act in

CMMF’s best interests by, among other things, purchasing appropri-

ate securities for CMMF’s portfolio in the first instance and monitor-

ing those investments in good faith, consistent with their superior

knowledge of the market.

cxxx. As part of their fiduciary obligations, JPMorgan and Mr. Ufferfilge

were required at a minimum to: (a) fully disclose the credit worthi-

ness of the collateral underlying CMMF’s investments; (b) fully dis-

close the potential impact of market shifts on the value of invest-

ments in CMMF’s portfolio; (c) provide accurate valuation of the se-

curities; and (d) consistently monitor any changes in the market af-

fecting purchases of securities and take appropriate actions warran-

ted by any changes.

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 cxxxi. JPMorgan and Mr. Ufferfilge breached the fiduciary duties they

owed to CMMF in multiple respects. Among other things, JPMor-

gan and Mr. Ufferfilge: (a) failed to sell off the risky investments

they made in securities affected by the residential real estate market

despite their awareness that JPMorgan’s parent company, JPMorgan

Chase, was selling off its own affected positions and advising its cli-

ents to do the same; (b) continued purchasing securities collateral-

ized by residential real estate after they became aware that the delin-
quency and default rates of the mortgages underlying those securities

would continue to rise, subjecting CMMF’s portfolio to levels of risk

for which it had not bargained; (c) negligently misrepresented the

level of risk associated with these purchases; and (d) failed to

provide accurate portfolio valuations to CMMF when JPMorgan and

Mr. Ufferfilge became aware that the marks provided by the pricing

service JPMorgan employed were lagging behind the market.

cxxxii. The acts and omissions of JPMorgan and Mr. Ufferfilge in breaching

their fiduciary duties were without justification and in negligent dis-

regard for the rights of CMMF and the propriety of its investments.

cxxxiii. As a direct and proximate result of JPMorgan and Mr. Ufferfilge’s

breaches of their fiduciary duties, CMMF has suffered damages in an

amount to be proved at trial, but not less than $98 million.

FOURTH CLAIM FOR RELIEF

(Negligent Misrepresentation against JPMorgan and Mr. Ufferfilge)

cxxxiv. Paragraphs 1 to 133 are incorporated as if fully set forth herein.

cxxxv. JPMorgan and Mr. Ufferfilge had a duty to provide CMMF com-

plete, accurate, and timely information regarding the value and risks

of its investments.

44
 cxxxvi. JPMorgan and Mr. Ufferfilge were aware that CMMF relied on JP-

Morgan’s expertise and experience as a sophisticated investment

manager, and depended upon JPMorgan and Mr. Ufferfilge to

provide accurate and truthful information regarding its portfolio.

cxxxvii. JPMorgan and Mr. Ufferfilge made repeated material misrepresenta-

tions and omissions to CMMF which they knew, or were negligent in

not knowing, were false. Specifically, JPMorgan and Mr. Ufferfilge

misrepresented to CMMF that investments in securities backed by

residential real estate were protected by underlying collateral of the

highest and most stable credit quality available on the market be-

cause: (a) repayment in the event of default was guaranteed by gov-

ernment agencies; (b) the securities were AAA-rated; (c) the securit-

ies all received super senior tranching; and (d) the securities were

highly overcollateralized, all factors which JPMorgan and Mr. Uffer-

filge led CMMF to believe insulated it against expected default risks

in the collateral pool. JPMorgan and Mr. Ufferfilge also repeatedly

represented that the portfolio had suffered a fraction of its actual

losses based on a pricing system that they knew to be misleading.

cxxxviii. These statements were material to CMMF’s decision to keep its

money invested with JPMorgan.

cxxxix. JPMorgan and Mr. Ufferfilge held themselves out as having superior

knowledge of the market and special expertise in preserving princip-

al and liquidity for investors seeking conservative returns. JPMor-

gan and Mr. Ufferfilge were fully aware of CMMF’s goals based on

CMMF’s negotiation of a conservative approach as reflected in the

IMA and Guidelines.

45
 cxl. JPMorgan and Mr. Ufferfilge had a duty to CMMF to disclose,

among other things: (a) material facts concerning the likelihood of

repayment in the event of default; (b) that the ratings did not accur-

ately reflect the credit quality of the securities held in the CMMF

portfolio and in fact grossly underestimated the true risk of loss; (c)

that the securities lacked structural protection because the majority

of them were not super senior or properly collateralized; and (d) that

the pricing they provided severely underestimated the potential

losses CMMF faced by maintaining residential real estate securities

in CMMF’s portfolio. JPMorgan and Mr. Ufferfilge failed to exer-

cise reasonable care or competence in obtaining or communicating

this information, and consequently breached their duty to provide

such information to CMMF.

cxli. CMMF reasonably relied on the information provided by JPMorgan

and Mr. Ufferfilge, and was damaged as a direct and proximate result

of JPMorgan’s and Mr. Ufferfilge’s misrepresentations in an amount

to be proved at trial, but not less than $98 million.

PRAYER FOR RELIEF

WHEREFORE, CMMF respectfully requests that this Court enter

judgment and grant the following relief:

(a) An award of an amount to be proven at trial in compensatory damages for the

losses that CMMF incurred as a result of the acts and omissions of JPMorgan and

Mr. Ufferfilge set forth in this Complaint;

(b) An award of punitive damages;

(c) An award of all costs incurred in connection with the prosecution of this action;

46
 (d) An award of attorneys’ fees incurred in the prosecution of this action;

(e) Prejudgment and post-judgment interest as allowed by law;

(f) Such other and further relief as the Court may deem just and proper.

DATED: New York, New York

June 22, 2009
QUINN EMANUEL URQUHART OLIVER &
HEDGES, LLP

By:
Richard I. Werder, Jr.
Philippe Z. Selendy
Rebecca J. Trent
Eve S. Moskowitz

51 Madison Avenue, 22nd Floor

New York, New York 10010-1601
(212) 849-7000
Attorneys for Plaintiff CMMF, LLC

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