Ruling in Fraud Lawsuit Goes Against J.P. Morgan

J.P. Morgan Chase & Co. Vice Chairman Donald Layton’s e-mails describing prepaid transactions as “disguised loans” may be admitted as evidence in a fraud trial, a judge ruled Monday in a blow to the bank’s case.

J.P. Morgan has sued 11 insurers to force them to pay $1 billion on six surety bonds backing oil and gas trades between Enron Corp. and Mahonia Ltd., an offshore entity sponsored by the bank. The insurers refused to pay after Enron’s collapse, saying the bank deceived them into backing loans, not commodity trades.

U.S. District Judge Jed Rakoff said the insurers may present evidence of the e-mails, which the judge last week described as “explosive.” Rakoff turned aside the bank’s bid to exclude the e-mails and said they may be “highly probative” if the jury accepts the insurers’ interpretation of what they mean.

“If the jury accepts defendants’ view of what the e-mails are referring to (as the jury reasonably might), the term ‘disguised loan’ is highly relevant and precisely descriptive of what is involved,” Rakoff said in a 10-page ruling.

The insurers in the case include units of Allianz AG Holding, Chubb Corp., CNA Financial Corp. and Kemper Insurance Cos.

The e-mails at issue date from May 1999 and are a major part of the insurers’ case. In them, Layton discusses aspects of the bank’s derivatives and prepaid commodities transactions. Rakoff earlier said the insurers could use them, only to reconsider last week.

J.P. Morgan has denied wrongdoing in using Mahonia, saying it properly employed the entity to help companies raise capital.