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JPMorgan to Face "London Whale" Lawsuit; Troubles Ahead?

Before JPMorgan Chase & Co.JPM could breathe a sigh of relief on the dismissal of three investor lawsuits related to the "London Whale" case, trouble mounted again for the banking behemoth. The U.S. District Judge George Daniels in Manhattan rebuffed the bank's arguments against class action certification, as reported by Reuters.

JPMorgan's shareholders succeeded in receiving court permission to pursue the lawsuit over the bank officials' insufficient actions to avoid losses in the London Whale trading scandal. The class action certification usually leads to elevated settlements as plaintiffs sue as a group rather than individually.

The Back Story

The London Whale matter, which came into light in 2012, brought on a slew of lawsuits, criticism and troubles for JPMorgan. In May 2012, the unsound derivatives trading strategy of Bruno Iksil and other London employees caused JPMorgan around $6.2 billion in losses.

The portfolio handled by Iksil was exclusively designed to hedge the bank's risk exposure. His flawed strategies, however, resulted in him being nicknamed "London Whale" and led to the start of JPMorgan's multi-year long battle.

While JPMorgan encountered criticism from the U.S. senate for its poor risk management practices dating back to 2010, investors cried foul and accused the bank of deliberately supporting Iksil despite understanding the risks involved in his approach and the magnitude of his derivative bets. The bank originally acknowledged only $2 billion in losses and later restated its 2012 first-quarter earnings to account for the massive trading loss.

The delayed admission cost JPMorgan shareholders' ire against chief executive officer Jamie Dimon and former finance chief Douglas Braunstein. Shareholders also alleged that the bank misled them about its investment segment's ability to manage risk and showed negligence in suing the people at fault.

Several shareholder lawsuits have been dismissed over the years with the court ruling out any fraudulent activities and negligence on JPMorgan's behalf. However, the bank had to shell out more than $1 billion as fines over losses due to its weak compliance and risk controls.

Our Take

Though JPMorgan has been hit by many lawsuits since the 2008 financial crisis, the London Whale scandal got excessive publicity as it dented the bank's reputation for managing risk properly. While no action was taken against Iksil as his trading strategies were legal, the scandal cost Dimon a 50% cutback in his 2012 pay.

While the matter highlighted the complexity and excessive risks involved in derivatives instruments like credit default swaps, it also brought into notice the poor oversight of the financial system worsening the situation.

Currently, JPMorgan carries a Zacks Rank #3 (Hold). Some better-ranked banking stocks include SunTrust Banks, Inc. STI , Wells Fargo & Company WFC and SVB Financial Group SIVB . All these stocks hold a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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