JPMorgan to Face ''London Whale" Case - Analyst Blog

Legal hassles pertaining to ‘London Whale' trading loss of $6.2 billion continue to haunt JPMorgan Chase & Co. JPM. U.S. District Judge George Daniels upheld the case filed by shareholders, which accused the company of covering up the risks related to derivative transactions.

Daniels stated that shareholders can pursue the case against JPMorgan Chief Executive CEO Jamie Dimon and former Chief Financial Officer (CFO) Douglas Braunstein for misrepresenting the facts about the company's risk management capabilities. Notably, simultaneously,  the judge dismissed two other cases related to the ‘London Whale' episode.

The judge dismissed a case against three other JPMorgan directors namely Ina Drew, who headed the Chief Investment Office (CIO); Mike Cavanagh, who preceded Braunstein as CFO; and Barry Zubrow, the then chief risk officer. Further, another lawsuit filed by the company's current as well as former employees who lost their money in their retirement accounts was also dismissed.

In the first quarter of 2012, JPMorgan incurred trading 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.

Following this disclosure, JPMorgan had to face the wrath of the investors, employees and regulators alike. Also, the company temporarily suspended its $15 billion share repurchase program. Consequently, last year, JPMorgan agreed to pay more than $1 billion to settle various investigations pertaining to the ‘London Whale' debacle conducted by regulators in the U.S. and U.K.

Apart from the aforesaid legal headwind, JPMorgan faces several other probes and lawsuits related to its business conduct. The company is facing investigation regarding its hiring practices in China, manipulation of benchmark interest rates (LIBOR) as well as rigging of foreign exchange rates, among others.

Moreover, along with Bank of America Corp. BAC, Citigroup, Inc. C and Morgan Stanley MS, JPMorgan is charged with mortgage related lawsuits pertaining to the financial crisis. Though the company is fundamentally strong, all these are expected to adversely impact its financials in the near term.

JPMorgan currently carries a Zacks Rank #3 (Hold).