On Wednesday, JPMorgan Chase & Co.’s (JPM) U.S. broker-dealer affiliate, J.P. Morgan Securities LLC, received court approval for paying $153.6 million to settle civil charges with the U.S. Securities and Exchange Commission (SEC).

Last week, SEC had alleged the bank of misleading investors in a synthetic collateralized debt obligation (CDO) known as Squared CDO 2007-1 that was tied to the U.S. housing market.

The investors suffered significant losses for investing in this product when the housing market collapsed. As part of its settlement, JPMorgan also consented to improve its reviews and approve its mortgage securities transactions.

JPMorgan neither admitted nor denied the allegations but consented on settling the case. According to court’s approval, JPMorgan will pay a civil penalty of $133 million, $18.6 million repayment of its profits and $2 million in interest. The settlement of such charges will facilitate the SEC to pursue more penalties against other Wall Street firms over such transactions.

According to a statement by JPMorgan, the company had suffered around $900 million in losses on the investment. The company also reviewed certain CDOs and voluntarily paid $56 million to the investors in a transaction known as Tahoma CDO.

Last week, Madoff Securities trustee, Mr. Irving Picard, in an amended lawsuit filed has claimed compensation of nearly $19 billion from JPMorgan for its alleged role in the scam revolving around Bernard L. Madoff Investment Securities LLC.

However, a JPMorgan spokesperson commented that the company was neither aware nor a part of the fraud that was plotted by Madoff in its Ponzi fund scheme. JPMorgan has also stated that as a trustee, Mr. Picard’s duty is to investigate the Madoff fraud instead of filing lawsuits against the company. In 2009, Mr. Madoff had pleaded guilty of running a Ponzi scheme and is presently serving a 150-year prison sentence.

JPMorgan is not the only one to have been sued by the trustee. There are nearly 1,000 lawsuits filed by the trustee in the bankruptcy court in order to recover about $90 billion from various banks and other Madoff investors, who profited from the fraud. Major companies among them include HSBC Holdings plc (HBC), who was sued $9 billion, and UniCredit SpA, a defendant along with Bank Medici AG and its founder Sonja Kohn, who was sued $59 billion.

The SEC has stepped up its investigation on Wall Street companies over the sale of CDOs that were responsible for significant losses to investors and financial crisis. Last year, The Goldman Sachs Group Inc. (GS) settled a charge by paying $550 million for not disclosing to the buyers the role of a hedge fund in formulating the CDOs and taking a short position and betting on them to perform poorly in the open market.

While such charges will dent JPMorgan’s reputation and its financials, we believe that they are a relief for investors, who have lost their hard-earned money in such investments.

Shares of JPMorgan currently retain its Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we maintain our long-term Neutral rating on the stock.

 
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