There seems to be no end to
JPMorgan Chase & Co.
) woes following the announcement of its huge mark-to-market loss
of about $2 billion in the first six weeks of the second quarter.
The company's shareholders have recently sued the CEO and top
management for alleged misrepresentations of the facts in two
separate lawsuits filed in the U.S. District Court in
The litigations filed against JPMorgan claim that the top
management misled the investors regarding the potential risks
involved in complex bets that were placed. Last week, the company
had announced that it had incurred losses in an index of credit
default swap (a type of derivative), which was supposed to protect
the company against the potential losses on its large holdings of
loans and bonds. However, the company's strategy backfired as the
repositioning of the credit portfolio was poorly monitored and
One of the lawsuits is filed by Arizona-based Saratoga Advantage
Trust financial services portfolio, while the other is filed by an
individual investor, James Baker. The former filed a
securities-fraud lawsuit on behalf of all those investors who lost
their money on the shares (between April 13 and May 10) due to the
misleading statements that the company's management gave related to
The other case is a shareholder derivative lawsuit filed against
JPMorgan's top management and Board of Directors. The litigation
alleges that the senior executives made a drastic change in the
company's derivative exposure without disclosing it to the
investors. The lawsuit charges the top management of breaching
fiduciary duty and wasting corporate assets.
The securities fraud litigation seeks an undisclosed amount in
damages on behalf of the investors, while the shareholder
derivative lawsuit seeks an unstipulated amount from JPMorgan's
senior management. The lawsuits also request a court order,
necessitating the company to enhance its corporate governance
practices and ensure that management will be instantaneously
informed about the objectionable trading risks.
Woes Not Expected to End in the Near-Term
The announcement of significant trading losses at JPMorgan is
pressurizing the regulators to apply stringent regulations on
financial companies. In addition to this, the company's losses have
been under intense scrutiny by the Department of Justice and the
Federal Reserve. The FBI has also joined the fray to inquire about
The New York Times
, the trading losses incurred by JPMorgan have increased further by
50% in the last few days contradicting CEO's expectation of not
incurring further losses in the quarters ahead.
All the major banks in the country such as
Bank of America Corporation
Wells Fargo & Company
The Goldman Sachs Group Inc.
) follow the trend set by JPMorgan. Over the last several quarters,
we have seen that even the announcements of quarterly financial
results by almost all the major banks followed the company's
footsteps. However, we hope that other banks are not going to turn
up with similar trading loss announcements.
Further, JPMorgan runs the risk of further hedge-related losses
over the quarter. These losses are expected to significantly dampen
the company's overall financial results in the second quarter.
Currently, JPMorgan retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Considering the fundamentals, we
also maintain a long-term Neutral rating on the stock.
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