After facing the wrath of U.S. regulators and investors as well as compensating over $1 billion, JPMorgan Chase & Co.’s JPM “London Whale” scandal took a new turn. The lawsuit filed by shareholder Ernesto Espinoza over the bank officials’ insufficient actions to avoid losses was dismissed yesterday by a federal appeals court.

The court’s decision was further supported by the 2nd U.S. Circuit Court of Appeals in New York. Notably, three investor lawsuits in New York and Delaware filed against JPMorgan’s executives and directors have previously been dismissed.

Flashback

The London Whale matter, which came into light in 2012, brought on a slew of lawsuits, criticism and troubles for this banking behemoth. In May 2012, the unsound derivatives trading strategy of Bruno Iksil and other London employees caused JPMorgan around $6.2 billion in losses.

The portfolio handled by Iksil was exclusively designed to hedge the bank's risk exposure. His flawed strategies, however, resulted in him being nicknamed “London Whale” and led to the start of JPMorgan’s multi-year long battle.

While JPMorgan encountered criticism from the U.S. senate for its poor risk management practices dating back to 2010, investors cried foul and accused the bank of deliberately supporting Iksil despite understanding the risks involved in his approach and the magnitude of his derivative bets. The bank originally acknowledged only $2 billion in losses and later restated its 2012 first-quarter earnings to account for the massive trading loss.

The delayed admission cost JPMorgan shareholders’ ire against the chief executive officer Jamie Dimon and former finance chief Douglas Braunstein. Shareholders also alleged that the bank misled them about its investment segment's ability to manage risk and showed negligence in suing the people at fault.

Several shareholder lawsuits have been dismissed over the years with the court ruling out any fraudulent activities and negligence from JPMorgan’s side. However, the bank had to shell out more than $1 billion as fines over losses due to its weak compliance and risk controls.

Our Take

Though JPMorgan has been hit by many lawsuits since the 2008 financial crisis, the London Whale scandal got excessive publicity as it dented the bank’s reputation for managing risk properly. While no action was taken against Iksil as his trading strategies were legal, the scandal cost Dimon a 50% cutback in his 2012 pay.

While the matter highlighted the complexity and excessive risks involved in derivatives instruments like credit default swaps, it also brought into notice the poor oversight of the financial system worsening the situation.

Currently, JPMorgan carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance space include Central Valley Community Bancorp CVCY, HomeStreet, Inc. HMST and Northern Trust Corporation NTRS. While Central Valley and HomeStreet sport a Zacks Rank #1 (Strong Buy), Northern Trust holds a Zacks Rank #2 (Buy).

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