Bet against retail costs investor big-time

Jerica Capital Management, caught in short squeeze, sues its own banker

National /
Nov.November 03, 2021 07:00 AM

Jamie Dimon (Chief Executive Officer, JPMorgan Chase) (Getty Images, iStock)

A hedge fund that lost millions betting against commercial real estate now claims that JPMorgan forced it to call off the gamble at the worst time, then pumped up the price of paying its tab.

Jerica Capital Management, founded by CRE veteran Warren Ashenmil in 2012, entered into a $125 million contract with JPMorgan in 2017 to short a pool of commercial mortgages weighted heavily toward retail properties.

It was a wager by Jerica that retail would struggle: Short sellers borrow shares of something and immediately sell them, hoping to buy the shares back later at a lower price. The hedge fund said the play was largely uneventful until earlier this year when it fell victim to a short squeeze.

In a lawsuit filed in Manhattan last week, Jerica claims JPMorgan unexpectedly terminated its short contract at the height of the squeeze. Then the bank allegedly made moves to set the price of settling the contract 30 percent higher than it should have been, Jerica asserts.

The hedge fund said JP Morgan’s decision making was “infected” by incentives that made a bad situation worse for Jerica.

“At best, JPMorgan was agnostic, willing to take whatever number the third party threw out, because whatever it ‘lost’ to that third party it would just gain back from Jerica,” lawyers for Jerica wrote in court papers. “At worst, JPMorgan would crassly see an opportunity to earn loyalty from its other customer by offering that customer a sweetheart deal on the hedge close-out.”

The drama highlights the potential conflicts that investors step into when they deal with a large-reaching institution like JPMorgan, which is often on different sides of the same deal. And it points to a small but potentially disastrous risk that short-sellers take.

The trade started back in 2017, when Jerica shorted CMBX 4, an index for a pool of commercial mortgage backed securities. About 51 percent of the pool was loans on retail properties. Many investors at the time foresaw the impact that e-commerce would have on brick-and-mortar retail.

Things started to go wrong, according to Jerica, when JPMorgan required it to hold an inordinate amount of collateral against the shorted assets. The fund said JPMorgan used an obscure calculation method requiring it to post cash collateral representing 37 percent of its shorted assets, although other banker dealers required only 8 percent to 12 percent.

That left Jerica light on cash when it got hit by the short squeeze, in which investors drive up the price of a shorted stock to force short sellers to buy the stock at the higher price. Because the potential loss in such situations is unlimited and can wipe out a short player, JPMorgan demanded more collateral in order to not be stuck with the bill.

Jerica said the squeeze and JPMorgan’s demands for a large collateral buffer put it into default. The fund notified the bank it had breached the contract in the hopes the two sides could negotiate a solution.

But then, Jerica claims, JPMorgan unexpectedly terminated the contract, forcing the hedge fund to close out the contract at market price.

The fund alleges JPMorgan made two moves that made exiting more costly. One, it terminated the contract on the Thursday before Labor Day, when trading volumes are typically low. And two, Jerica claims the bank half-heartedly closed out its side of the CMBX deal at the “unthinkable” share price of $101, roughly 30 percent higher than Jerica’s cost should have been.

Instead of owing Jerica roughly $5.8 million on the deal, JPMorgan ended up collecting about $220,000, the hedge fund claims.

Jerica is seeking $11 million in damages. A spokesperson for JPMogan declined to comment, and a representative for Jerica could not be immediately reached.





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