(CN) - Shareholders hit JP Morgan Chase & Co. with a class action after the financial holding giant's announced $2 billion in losses during the first quarter of this fiscal year.
The class claims JP Morgan failed to disclose risky trades while telling shareholders that its derivatives were "hedges" that would help offset overall portfolio risk.
"Every bank has a portfolio; in those portfolios you make investments that you think are wise to offset your expenditures. Obviously, it's a big portfolio . . . but at the end of the day that is our job to invest that portfolio wisely, intelligently over a long period of time to earn income and to offset other exposures that we have," the complaint states, quoting CEO James Dimon. The bank failed to disclose just how much money it had lost before it held an investor conference call on April 13, after the release of the bank's first quarter earnings statement earlier the same day.
"We invest those securities in high grade, low risk securities," CFO Douglas Braunstein said during the call. "The vast majority of those are government or government backed and very high grade in nature.
"We invest those in order to hedge the interest rate risk of the firm as a function of that liability and asset mismatch."
Shareholders claim the statements made during the call were "materially false and misleading" because they failed to reveal the truly dangerous nature of the company's speculative trades and the enormous losses it had already experienced.
A month later when JP Morgan filed its 10-Q, it was déjà vu. When the company held another conference call with analysts and investors to reveal that it had sustained "a multi-billion dollar trading loss" Dimon stated that "the synthetic credit portfolio was a strategy to hedge the firm's overall credit exposure, which is our largest risk overall in a stressed credit environment. We are reducing that hedge, but in hindsight the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored."
After the information was released, the company's stock fell $40.74 to $36.96 per share, according to the suit.
Additionally, the Washington Post reported that the Justice Department has begun a probe into the bank's losses and the actions of its CEO. The investigation is supposedly in its early stages but sources told the Post that the feds are attempting to determine whether the losses were a result of a poorly executed hedge fund or if the bank was betting for its own profit.
Regulators will be looking at the company to determine if it violated security laws by not writing down losses that resulted from trades.
Lead plaintiff David Smith is represented by Samuel H. Rudman and David Rosenfeld of Robbins Geller Rudman and Dowd LLP of Melville, N.Y. and Darren J. Robbins and Dave Walton of Robbins Geller Rudman and Dowd LLP of San Diego.