[ by Howard Haykin ]

What may soon be classified as a class action suit against JPMorgan Chase is based on alleged deception by bank officials, such as lowballing and downplaying the London Whales trading losses, even as it hurtled toward its that ultimately $6.2 billion loss.  Attorneys for the plaintiffs - the JPM shareholders - received a delay until 4/12/13 for presenting their case in court.  Besides the gift of time, they received findings compiled by a Senate investigation into the bank's so-called "whale trades"  - all 307 pages, prepared by the staff of the Senate Permanent Subcommittee on Investigations. 

How Did JPMorgan's CIO Trading Strategies Go Wrong?  Let Us Count the Ways.    The report released Thursday evening, 3/14, is a trove for plaintiffs' lawyers.  Its well-documented allegations cover, among other things: 

• Overly risky, undersupervised trading by JPMorgan's chief investment office ("CIO");
• Deliberate attempts by the CIO to minimize the appearance of burgeoning losses;
• Subsequent efforts by the bank to mislead regulators and investors about the CIO's activities and losses.
• Senior bank managers, who were made aware of the build-up of massive losses, 

⇒ stopped porviding credit loss protection to the bank;
⇒ publicly downplayed those problems;
⇒ referred to the CIO portfolio as a risk-reducing hedge for as long as possible - until it was apparent the bank had lost billions.

It's a (Rare) Gift.   There's mounds of evidence from most if not all key players at JPMorgan.  And, the Senate subcommittee then took all the collected evidence and mapped out precisely what it considered to be misleading statements by top bank officials alongside its evidence that JPMorgan knew the statements were false at the time they were made.

• CEO Jamie Dimon and CFO Douglas Braunstein made comments during the infamous 4/13/12 analysts' earnings call in which JPMorgan first publicly discussed the CIO and its increasingly troubled portfolio, after news stories earlier in the month reported that JPMorgan's position was warping the derivatives market.

⇒ The Senate subcommittee doesn't supply indisputable evidence that Mr. Dimon or ​Mr. Braunstein deliberately lied to analysts about the CIO.  Yet, it offers a fair amount of inference in the knowledge imputed to  Mr. Dimon or ​Mr. Braunstein in the report.

• A ton of detail about what JPMorgan knew or should have known at the time of the analyst call.

• While Dimon told analysts that the controversy was a "tempest in a teapot" (a comment he has since said he regrets), the Senate report documents that Dimon already knew the CIO portfolio had serious issues:

⇒ That the bank had experienced 3 months of losses - including exponentially rising losses the previous month;
⇒ That the bank would have difficulty extricating itself from the CIO's positions.
⇒ On that same earnings call, Mr. Braunstein said the CIO's trading positions were subject to the bank's risk management processes;
⇒ Mr. Braunstein further added that:  (i) the trading was "fully transparent" to regulators;  (ii) the bank regularly briefed regulators on its portfolio; (iii) positions were managed on a long-term basis; (iv) positions reflected hedging strategies pertaining to portfolios held in other areas of the bank.

• To the contrary, the Senate report offers evidence that Mr. Braunstein had been informed that CIO positions and trades were inconsistent with long-term protection against credit risk. The report doesn't specifically accuse him of misrepresenting his own knowledge of CIO risk management or reports to regulators, but said his statements were "mischaracterizations" that omitted facts known to JPMorgan.

• The bank was characterized as massaging its message about CIO positions and losses, as documented in emails involving JPMorgan's corporate communications staff.

• The head of that department supposedly devised the strategy of telling analysts that CIO trading was a long-term hedge against structural risk that was reported to regulators.

• His "tempering" of the exact words in which the bank would describe the CIO's role "shows that bank was aware that its initial characterizations were not entirely true."

• The day after the public relations strategy launched, a trader in the CIO sent an email to his boss. "The market is quiet today," he said. "The bank's communications yesterday are starting to work."

• JPMorgan failed to control the risk of the CIO's portfolio is well-detailed;

• The bank's well-documented efforts to keep the Office of the Comptroller of the Currency in the dark - first about the very existence of the CIO and then about its losses.

• Overall top JPMorgan officials are portrayed as negligent, at best, in overseeing the activities of a trading group with an unclear mandate and a confusing strategy to mitigate losses as they developed.

Decision on Class Action Status.   If U.S. District Judge George Daniels of Manhattan eventually certifies a class, how big is JPMorgan's exposure?  hat will depend on the length of the class period. The shareholders' complaint filed in November proposes a much longer class period than plaintiffs initially suggested, dating back to Feb. 24, 2010, when JPMorgan shares traded at about $40, and ending on May 21, 2012, when shares closed at about $32 after the bank restated earnings to reflect CIO losses. That period would permit anyone who bought or sold shares over those two years to claim damages for their losses. For a company with a public float of more than 3.75 billion shares, those are potentially vast numbers.

• JPMorgan is likely to argue that any class period should be much shorter, and in that argument it might even find support in the Senate report.
• The subcommittee pinpoints supposed misstatements to the market in that April 2012 analyst call.
• The bank issued corrective disclosures less than a month later.
• If plaintiffs get past the dismissal stage of the case, expect JPMorgan to assert that the class period should be restricted to the few weeks between the analyst call and the May 2012 filings that disclosed larger CIO losses.

JPMorgan told Reuters Thursday that despite the Senate committee's portrayal (and its own previous admission of mistakes in the handling of the CIO), "our senior management acted in good faith and never had any intent to mislead anyone." JPMorgan counsel Daryl Libow of S&C declined comment.
 

For further details, go to:   [ Reuters, 3/15/13 ].