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JPMorgan Under DOJ Probe

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It seems that JPMorgan Chase & Co.’s (JPM - Free Report) problems are here to stay owing to the misconduct of Bear Stearns Co. – acquired in 2008 – leading to the financial crisis. On Wednesday, Reuters reported that the U.S. Department of Justice (DOJ) has started an investigation in to this matter.

The DOJ is probing the accusations, which allege Bear Stearns of defrauding a large number of mortgage bond investors by providing deceptive information. The DOJ is trying to figure out whether Bear Stearns distorted the information provided by third parties related to the quality of mortgage loans packaged into securities.

Last year, the DOJ had issued about a dozen subpoenas to many financial institutions related to the sale of risky mortgage-backed securities (MBS), including JPMorgan, Bank of America Corporation (BAC - Free Report) , Citigroup Inc. (C - Free Report) and The Goldman Sachs Group, Inc. (GS - Free Report) . All the inquiry is being conducted under the aegis of the Residential Mortgage-Backed Securities Working Group, which was formed by President Barack Obama in Jan 2012 to investigate and impeach the alleged misconducts that led to the financial crisis.

In Oct 2012, JPMorgan was accused of a civil fraud by the New York Attorney General (AG), Eric Schneiderman. As per the complaint, the investors suffered losses of about $23 billion as a result of flawed documents used by Bears Stearns. The litigation has been filed with the backing of the RMBS Working Group. However, it is not clear whether the DOJ’s investigation would lead to a separate lawsuit or will be combined with other regulatory bodies’ inquiry.

JPMorgan has been facing litigations and probes related to MBS sold by Bear Stearns. In Dec 2012, the U.S. regulator for credit unions – National Credit Union Administration (NCUA) – sued its unit, J.P. Morgan Securities, for misrepresentation in the underwriting and sale of MBS worth over $3.6 billion.

Yet, in Nov 2012, the company resolved a lawsuit that accused Bear Stearns of repackaging and selling residential loans to the investors. The investigation was being conducted by the Securities and Exchange Commission (SEC).

JPMorgan continues to encounter many other probes and lawsuits from the investors and regulators pertaining to its role during the recession. Along with these, the company is facing investigations for the trading debacle, its alleged role in rigging the LIBOR rates and for money laundering. However, on the brighter side, the ill-effects of these are likely to be eliminated by the strong fundamentals of the company.

Currently, JPMorgan retains a Zacks Rank #3 (Hold).

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