January 18, 2019 / 10:57 PM / a month ago

LJM Partners sues unnamed 'manipulators' it blames for volatility losses

NEW YORK (Reuters) - LJM Partners Ltd on Friday filed a lawsuit against unnamed parties it holds responsible for hundreds of millions of dollars it lost after last year’s jump in stock market volatility that effectively put the fund manager out of business.

LJM invested in complex derivatives that lost most of their value over two days in early February 2018 following the biggest-ever single-day jump in the VIX volatility index . LJM later returned what remained of clients’ money.

The Chicago-based fund manager was one of the largest casualties of the spike in volatility, which wiped out several derivative-linked investments that had delivered profits in calmer markets.

The losses have prompted more than two dozen lawsuits from various traders and firms that say they lost money due to manipulation of the VIX, the widely followed “fear gauge” that acts as a barometer of future expected swings in the S&P 500 stock index.

In its lawsuit, filed in federal court in Chicago, LJM said it wants Cboe Global Markets Inc, which owns the VIX index, to unveil the identities of parties it believes were responsible for manipulating the index and crashing the market.

Cboe, which is not a party to the lawsuit, declined comment. It has previously said it monitors markets to identify problems.

The lawsuit alleges that when the S&P 500 fell 4.1 percent on Feb. 5 last year, unnamed parties posted inflated prices for related options, boosting the VIX to benefit positions they held in VIX-linked products.

Those actions lifted the VIX and affected the price of other financial instruments that move in tandem with the options, including some traded by LJM. LJM said it was forced to trade in the instruments at artificial prices and suffered millions of dollars in losses as a result.

LJM said in the lawsuit that it had the right to obtain the identities of parties it believed to have manipulated the market from Cboe.

The fund manager filed an earlier claim blaming its VIX-related losses on the actions of its broker, a Wells Fargo & Co unit, which it said forced the unwinding of its portfolio at a disadvantageous time.

Wells Fargo, which asked a court for help retrieving $16.4 million from LJM, denied those claims. A judge dismissed LJM’s claims against Wells Fargo in September but the fund manager has asked the court to reconsider.

The case is LJM Partners Ltd v. John Does, U.S. District Court, Northern District of Illinois, No. 19-cv-00368.

Reporting by Trevor Hunnicutt; Additional reporting by Saqib Iqbal Ahmed; Editing by Bill Rigby

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