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JPMorgan Relieved from SRM Global's Charges

Zacks Equity Research

As a respite for JPMorgan Chase & Co. (JPM), a lawsuit against its Bear Stearns unit was dismissed by a U.S. district court on Wednesday. The news was confirmed by a Bloomberg report.

The suit filed by hedge fund, SRM Global, accused Bear Stearns of misleading investors by lending faulty mortgage-backed loans and securities. Moreover, though the financial health of this mortgage lender was not sound, the investors were kept in the dark. This led to more than $200 million loss for SRM Global.

However, the plea to seek compensation was turned down by Judge Robert Sweet in Manhattan primarily due to delay on the part of SRM Global in bringing forth their claim. Furthermore, SRM Global did not provide any proof related to the purchase of the faulty mortgage-backed securities, thereby failing to satisfactorily substantiate its actual reliance on the misinterpreted facts and information.

Additionally, JPMorgan has already entered into a nationwide settlement wherein it agreed to pay $275 million in cash to shareholders of Bear Stearns to compensate for losses incurred by them. Surprisingly, SRM Global stayed out of the deal and chose to sue the company separately.

The dismissal of the lawsuit eases JPMorgan’s legal woes to some extent. We believe that this is a much-needed relief for a company that has been grappling with litigations related to the troubled units that it purchased during the financial crisis. JPMorgan had actually bailed out the mortgage lender, which was on the verge of bankruptcy.

We have been witnessing JPMorgan going through a troubled time wherein the company paid hefty fines, accepted faults as well as initiated programs to enhance its loan review mechanism. The efforts on the company’s part reflect its desperate intend to put an end to legal issues and thereby focus on its core business.

Going forward, we remain optimistic about the banking bellwether’s growth prospects based on its strong financial foundation. Despite the huge legal expenses as well as reserves to cushion future legal issues, the company posted a profit last quarter.

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

Other major banks that are facing legal issues related to faulty mortgage-backed securities sold before the financial crisis include Bank of America Corp. (BAC), Citigroup Inc. (C) and Morgan Stanley (MS).

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