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JPMorgan Chase & Co. (JPM - Analyst Report) 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 - Analyst Report) 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.
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.