* Bank accused of deleting records, no wrongdoing admitted
* Judge grants preliminary OK of redemption program
* JPMorgan says to pay bondholders who present valid bonds (Adds JPMorgan comment and lawyer's comment)
By Jonathan Stempel
NEW YORK, March 7 JPMorgan Chase & Co (JPM.N) has settled a lawsuit accusing it of defrauding bond investors out of at least $1.2 billion through bad record keeping, court records show.
The settlement of the five-year-old case comes as banks' ability to handle paperwork faces intense scrutiny, especially over their mortgage operations.
Investors had accused JPMorgan of deleting records on $46.8 billion of bonds from roughly 6,500 bond issues that had not been cashed in, and then covering up its mistakes.
They said the second-largest U.S. bank did this so it could retain for itself unclaimed bond proceeds that belonged to thousands of investors.
The settlement agreement calls for JPMorgan to create a redemption program for investors who can show they have yet to be paid, and that their bonds have matured or been called by the issuers, according to a copy filed in federal court.
"Any party who presents a valid bond for payment will be paid," bank spokeswoman Jennifer Zuccarelli said in an email.
She added that the settlement entails a "nominal payment" that avoids the cost of further litigation. "We are satisfied with our business practices," Zuccarelli added.
U.S. District Judge Carol Bagley Amon in Brooklyn, New York, granted preliminary approval of the settlement on Feb. 28. JPMorgan denied wrongdoing, court records show.
The settlement covers an estimated 100,000 investors who owned bonds issued by New York state, New York City and other bond issuers from 1980 to 2006, where JPMorgan had served as an agent or custodian, court records show.
"Nobody knows how many people are going to make claims," Norman Kaplan, a lawyer for the plaintiffs, said in an interview. "This is an actual, out-of-pocket cash payment" for the bank, he added.
A May 26 hearing has been set on the proposed settlement.
In a Feb. 28 regulatory filing, JPMorgan estimated that legal matters might result in as much as $4.5 billion of losses not already covered by its litigation reserves.
Shares of JPMorgan closed down 0.7 percent at $45.19 on the New York Stock Exchange.
The case is Frankel et al v. Cole et al, U.S. District Court, Eastern District of New York, No. 06-00439. (Reporting by Jonathan Stempel in New York, editing by Matthew Lewis)