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Will Big Banks Ever Stop Getting Sued?

The Dow Jones Industrials (DJINDICES: ^DJI  ) ended its run of record highs today, dropping 22 points. Playing a big role in that relatively minor decline was JPMorgan Chase (NYSE: JPM  ) , which fell 1.5%. Yet, the latest news came after the market closed for the day, as the California Attorney General sued the banking giant over allegations of illegal debt-collection tactics from more than 100,000 credit card holders.

As Fool contributor John Grgurich noted earlier, today's decline in the bank's stock could stem from the fact that JPMorgan faces a critical shareholder meeting in less than two weeks, after which the role of CEO and Board Chairman Jamie Dimon could dramatically change. JPMorgan's share-price drop wasn't out of line with the performance of other banks, as fellow Dow component Bank of America (NYSE: BAC  ) fell 0.8%, while Citigroup (NYSE: C  ) and Wells Fargo (NYSE: WFC  ) lost about the same percentage as JPMorgan. Moreover, news of the lawsuit didn't move JPMorgan shares substantially in early after-hours trading.

But the suit is troubling for a couple reasons. First and foremost, the card-collection lawsuit makes allegations that look eerily similar to the mortgage robosigning debate that led to a massive settlement among various mortgage lenders. With hundreds of lawsuits being filed in a single day in some instances, the California AG argues that bank officials never reviewed files, bank records, or other documents before signing legal papers. It also alleges false misrepresentations that customers had been notified of the suits when customers were, in fact, unaware of them.

More importantly, though, the California AG's lawsuit represents just the latest in a seemingly never-ending timeline of litigation for major banks. Bank of America made huge progress earlier this week by settling a lawsuit with MBIA; yet, the very same day, the New York Attorney General filed suit against it and Wells Fargo alleging violations of the $25 billion settlement the banks made with federal and state regulators just over a year ago. Although major banks have won initial victories in lawsuits related to the LIBOR rate-fixing scandal, potential liability may nevertheless still exist there.

When will it end?
Clearly, the law should hold big banks accountable for their misdeeds, and where reasonable allegations exist, lawsuits aren't frivolous. But for bank investors, legal action after legal action makes it impossible for the industry to find closure after the financial crisis. Now that they've gotten their financial risks under control, banks need to do a better job with legal risk management if they want to avoid seeing their names in the headlines -- and on court papers.

JPMorgan still trades at a deep discount to its historic norms, leaving investors everywhere to wonder if this is the new normal, or if the stock is a screaming buy today. To help figure out whether JPMorgan is a buy today, check out The Motley Fool's premium research report on the company. Click here now for instant access!

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  • Report this Comment On May 09, 2013, at 9:37 PM, justryn wrote:

    No the suits will continue. I am employed by one of the forementioned lenders and can tell you from firsthand experience The Big banks are an easy target with a Gigantic Bulls, pretty easy to hit!

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