This year is turning out be a worse-than-expected period for
JPMorgan Chase & Co.
) as it has landed in troubled waters yet again. After stabilizing
to some extent following the huge trading debacle, the company is
now accused of a civil fraud by the New York Attorney General (AG),
Eric Schneiderman. The AG alleged that Bear Stearns - acquired by
JPMorgan in 2008 - defrauded a large number of mortgage bond
The lawsuit, filed under the New York's Martin Act (that does not
require proof of intent to mislead) has named J.P. Morgan
Securities, JPMorgan Chase Bank and JPMorgan's EMC Mortgage unit as
defendants. Though the litigation does seek any damages, it demands
proper compensation for the investors who were defrauded by
As per the complaint, the investors suffered losses aggregating to
about $23 billion - nearly 26% of the original value - as a result
of flawed documents used by Bears Stearns while selling more than
100 Residential Mortgage-Backed Securities (RMBS). These RMBS were
sold in the 2006-2007 period.
The lawsuit alleges that Bear Stearns, while selling the RMBS,
convinced the investors that the underlying loans had been
evaluated properly and were being monitored continuously. However,
Bear Stearns failed to do either.
Further, the executives ignored various negative signals that
showed that the underlying loans were most likely to fail and
continued to bundle them as RMBS and sold them to investors. Bear
Stearns also failed to take corrective measures once flaws were
detected. Also, the firm misled the investors about the quality of
the underlying loans.
Further, when these loans started defaulting in large numbers,
Bears Stearns demanded nominal cash payments from the originators
instead of asking them to buyback the loans. Also, the firm failed
to pass on this cash amount to the aggrieved investors.
The litigation has been filed with the backing of the RMBS Working
Group, which was formed by President Barack Obama in January to
investigate and impeach the alleged misconducts that led to the
financial crisis. The group consists of officials from the U.S.
Justice Department, the Securities and Exchange Commission, the FBI
and other federal and state officials.
JPMorgan's spokesperson, while commenting on the litigation, stated
that though the charges pertain to the period prior to its
acquisition of Bears Stearns, the company will challenge the
Many of the major banks continue to face problems related to the
acquisitions they made during the height of the financial crisis.
Bank of America Corporation
) announced a payment of $2.43 billion and said that they would
undertake various corporate governance changes to settle a
class-action lawsuit that was filed by its shareholders related to
the acquisition of Merrill Lynch & Co.
Apart from Merrill, BofA had acquired Countrywide Financial Inc.
in 2008. Both these acquisitions have been draining the company's
funds through various litigations and losses.
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JPMORGAN CHASE (JPM): Free Stock Analysis
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JPMorgan is passing through a rough patch with all the litigation
overhangs. Apart from the aforesaid litigation, the company is also
facing the money laundering probe and many other lawsuits related
to the sale of MBS. However, on the brighter side, the ill effects
of these are likely to be eliminated by the strong fundamentals of
JPMorgan currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we also
maintain a long-term Neutral recommendation on the stock.