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JPMorgan Chase & Co. ( JPM ) has hit the headlines yet again for
the wrong reasons. Israel -based Bank Hapoalim BM has gone to New York
State court and is pursuing approximately $361.2 million in residential
mortgage-backed securities from JPM, according to a Bloomberg report
published last Friday.
JPMorgan has been accused on grounds of common-law fraud, fake
inducement and negligent misrepresentation of facts. It is alleged that
substantial distortions and omissions were made by JPMorgan in the
offering documents for such investments. This in effect has caused
damages including market value loss on the securities.
However, JPMorgan is not the only one that the Israel bank is
charging with allegations. In April it sued Bank of America Corp. ( BAC )
over residential mortgage backed securities worth $721 million.
The mortgage loans were pooled together and packaged as bonds and
sold to investors. They constituted a significant part of the housing
bubble. So when the bubble burst, it sent the economy reeling. These
securities suffered severe losses and ultimately their market dried up.
The investors incurred billions of losses on such securities and have
accused the sellers on grounds of fraud for not making enough
disclosures about the risks associated with investments on such
securities.
This resulted in several lawsuits against the big Wall Street firms.
Moreover, the companies had to confront the wrath of the regulators and
are facing several investigations as well as penalties.
Other Litigations Against JPMorgan
Litigation issues do not seem to cease for the company. It recently
received preliminary approval from a federal judge over a $100 million
settlement related to a class-action lawsuit brought by upset credit
card holders over credit card terms violations.
In addition, JPMorgan is subject to various regulatory authorities’
scrutiny over its alleged involvement in the manipulation of the
benchmark interest rate – London InterBank Offered Rate (LIBOR) as well
as The Euro Interbank Offered Rate, or Euribor – for financial benefits.
Our Take
The increase in legal claims for JPMorgan pose a risk and can tarnish
its image. If it is found guilty, it is liable to be fined by
authorities. Often, the company itself opts for settlements in order to
reduce litigation hassles. Such a step on behalf of the company exhausts
its financials, which could have been invested in growth initiatives.
We remain skeptical and wait to see what the future holds.
JPMorgan otherwise boasts robust business diversification and sturdy
capital levels. Yet, pressure on net interest margin and regulatory
issues might mar the company’s results in the upcoming quarters.
The shares of JPMorgan retain a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals we also have a
Neutral recommendation on the stock.
