There seems to be no end to JPMorgan Chase & Co.‘s (JPM) 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 Manhattan.
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 executed.
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 losses.
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 same.
According to 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 (BAC), Wells Fargo & Company (WFC), The Goldman Sachs Group Inc. (GS), Citigroup Inc. (C) and Morgan Stanley (MS) 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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