JPM Shareholder Suit Will Hurt Shareholders

It didn’t take long for shareholder derivative suits to be filed against JPMorgan Chase in the wake of the $2 billion dollar trading debacle. Papers submitted in the Southern District of New York by three separate law firms allege JPM mislead investors about the extent of the trading loss prior to the May 10th announcement. While the shareholder frustration over the 12% drop of JPM valuation is valid, filing suits will ultimately do more harm than good for investors and their stock in the company overall.

This is not to excuse JP Morgan’s risk taking and cavalier behavior. The bank is not sufficiently policing itself and this lack of oversight allowed the Chief Investment Office to open positions larger than most senior executives were aware. Many prominent members in congress and aspiring to join Congress have discussed the need for government oversight. If more significant regulation was in place it is possible that positions of this magnitude would not be permitted and the whole ordeal could have been avoided.

There is no doubt that the Chief Investment Office was in the business of operating in risky areas. The CEO, Jamie Dimon, has been an outspoken advocate for freedom for banks to engage exotic and risky markets. Lets be clear, it’s highly unlikely that any position JPM held was illegal. Shareholders are upset that Jamie Dimon dismissed questions about the positions in April by saying there is a “tempest in the teapot.” They could rightfully argue that had they been informed of the type and weight of positions the Investment Office entered into, they would have sold their shares, avoided the risk, and ultimately the decline. But this seems like wishful thinking. Had JPM disclosed their bad positions in mid-April, the stock would have immediately tumbled then. The banking industry is always going to be a risk taking business. Given the size of JPM there will undoubtedly be bad calls that result in significant trading losses. It is a peril of being in the business. For an investor to second guess the company now, when they made a misstep, is cruel. As they say, hindsight is 20/20.

Setting aside the faulty basis for the suit, taking legal action against JPM further contributes to the devaluation of the stock. JPM will need to expend significant resources defending themselves in each case. Lawyers will need to be hired, executives’ will have their days interrupted for depositions and trial preparation, and any judgment or settlement will be paid directly out of JPM’s cash reserve. Each of these factors will be an expense that shrinks the bottom line, hurts profitability, and draws resources away from more efficient uses — all very negative for any shareholder. Second, filing a lawsuit generates plenty of negative publicity. The lawsuit will drag on for months, if not years, and constantly pop back into focus, reminding Congress and the public about JPM’s miscalculation. This period of prolonged, recurring negative press means JPM will be constantly having to defend their brand through increased marketing and public outreach. That is, at the expense of profits for the shareholders.

All this aside, members of the litigation class should not expect to receive compensation equal to their trading loss because the Court and lawyers will need to cover their overhead and fees first. Realistically the only ones benefiting are the lawyers — on both sides. Why would shareholders agree to harm the company they own to line the pockets of others?

Litigation in this case would do nothing to bolster the long term prospects of the company, and instead, only serve to undermine their future growth potential. Shareholders should leave the second guessing to the government instead of piling on to make matters worse.