Fund says Wells Fargo unit worsened 'vol-mageddon' losses -court filing

(Reuters) - A Chicago fund manager that suffered catastrophic losses in a market plunge this year has blamed the actions of its broker, a Wells Fargo & Co unit, according to court documents filed on Wednesday.

FILE PHOTO - The sign at a Wells Fargo banking location is pictured in Pasadena, California, U.S., September 8, 2017. REUTERS/Mario Anzuoni

The allegations were spelled out in response to a March lawsuit by Wells Fargo Securities against fund manager LJM Partners Ltd.

The response to the Wells Fargo Securities lawsuit is LJM’s first detailed public explanation of why it was one of the biggest casualties of February’s “vol-mageddon,” the volatility-linked collapse of investments that had profited in calmer markets.

LJM funds posted losses after the Cboe Volatility Index, the most widely followed barometer of price swings expected in the S&P 500 stock index, logged its biggest-ever single-day jump on Feb. 5.

But LJM’s losses only became permanent the next day, the fund’s lawyers said in a counter-claim filed in federal court in Manhattan. By the end of the two days LJM Partners and an affiliate had lost 80 percent or more of their value.

Wells Fargo Securities forced LJM to unwind its portfolio in “a series of catastrophic trades that locked in the portfolio’s primarily unrealized losses and made them real,” LJM said in the filing.

LJM lost $266 million across its funds, “at least $115 million more than if LJM had been allowed to apply its trading procedures,” the counter-claim said.

A spokeswoman for Wells Fargo said in a statement: “We will defend ourselves and strongly disagree with LJM’s claims.”

LJM founder Anthony Caine said in a letter to clients in February that working with its clearing broker, LJM “agreed that liquidation across all client accounts, regardless of clearing broker, was the most prudent action given market volatility and portfolio risks.”

Wells Fargo Securities has asked the court to help it retrieve $16.4 million, saying the brokerage covered LJM’s margin and losses with the Chicago Mercantile Exchange. Wells Fargo previously declined to comment on Caine’s account.

LJM, which along with the affiliate managed more than $1 billion earlier this year, has not answered questions since the company and the affiliate reported their funds’ losses. LJM later told clients it would return what was left of their money.

In Wednesday’s filing, LJM’s lawyers denied an earlier claim by Wells Fargo that the fund company is now likely to be insolvent.

Investors are suing Caine and Anish Parvataneni, a portfolio manager at LJM who previously worked for fund investor Ken Griffin’s Citadel, over what they said was inadequate disclosure about the risks of LJM’s investment approach.

Reporting by Trevor Hunnicutt; Editing by Eric Meijer and Susan Thomas