Class action filed against JPMorgan Chase relating to bet on derivative contracts

Posted on: June 1st, 2012 by Steve Larson
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On May 15, 2012, a shareholder filed a class action complaint in the United States District Court for the Southern District of New York on behalf of purchasers of common stock in JPMorgan Chase & Co. between April 13, 2012 and May 10, 2012 inclusive.

The lawsuit alleges violations of the Securities Exchange Act of 1934 that occurred when Defendants issued materially false and misleading statements regarding the losses and risk of loss to the company arising from massive bets on derivative contracts related to credit indexes reflecting interest rates on corporate bonds.  These derivative bets went horribly wrong, resulting in billions of dollars in lost capital for the company and billions more in lost market capitalization for JPMorgan shareholders.

As alleged in the lawsuit, JPMorgan’s credit index derivative positions were so large that they generated market rumors and press coverage in the weeks leading up to the company’s April 13, 2012 earnings conference call with investors.  Specifically, the lawsuit alleges that instead of disclosing the extremely risky nature of JPMorgan’s derivative bets, and the actual losses that had been incurred at the time, Defendants falsely characterized the derivative positions as mere “hedging” strategies.  JPMorgan’s CEO, Defendant James “Jamie” Dimon, went so far as to call press reports about the company’s derivative positions a “complete tempest in a teapot.”

Defendants’ public statements were materially false and misleading when made because they failed to disclose, among other things: (a) JPMorgan’s positions in the credit index-based derivative products were not for “hedging” purposes or to “offset other exposures” but were in fact trades on the company’s own account intended to generate income because they were not matched to offset other JPMorgan investments; (b) the company had already incurred significant and material losses in the credit index-based derivatives when the market learned of JPMorgan’s positions, and by the April 13, 2012 conference call with investors; and (c) the company faced potentially tens of billions of losses resulting from the credit index based derivatives, downgraded credit, and loss of reputational capital.  As a result of defendants’ false statements, JPMorgan’s securities traded at artificially inflated prices during the class period.

On May 10, 2012, JPMorgan filed an SEC Form 10-Q for the quarter ended March 31, 2012, and after the market close, held a business update conference call with analysts and investors.  During the May 10th call, Defendants revealed that the company had experienced a “slightly more than $2 billion trading loss under synthetic credit positions.”   As a result of this disclosure, the market price of JPMorgan’s common stock fell from $40.74 per share at the market close on Thursday, May 10, 2012 to $36.96 per share on May 11, 2012, falling more than 9% on extraordinary volume of 217 million shares.