JP Morgan Chase’s Bear Stearns Acquisition Could Make The Firm Vulnerable to Lawsuits

Following JP Morgan Chase & Co’s acquisition of Bear Stearns Companies Inc., JP Morgan Chase Chief Financial Officer Michael Cavanagh says the firm is reserving as much as $6 billion for “transaction-related costs,” including possible litigation.

Class action lawsuits could come from investors regarding corporate disclosure, as well as from employees over pension plans. Any securities lawsuits targeting Bear Stearns as the plaintiff will also go to JP Morgan Chase.

Lawsuits expected may include those related to the 1934 Securities Exchange Act Section 10(b) (a general antifraud provision) by investors that may feel that Bear Stearns did not disclose accurate information about the company’s health. Employees may sue if they believe that the Employee Retirement Income Security Act (ERISA) had been violated.

On March 16, The Federal Reserve, accompanied by shareholder consent, had approved of a financing plan that allowed JP Morgan Chase & Co. to extend up to $30 billion in nonrecourse lending to the combined entity. This allowed the Wall Street firm to acquire the faltering Bear Stearns. The vote by Federal Governors to allow the loans was unanimous.

The loans gives JP Morgan Chase assurances over $30 billion worth of assets, including subprime lending arrangements and commercial mortgage-backed securities, that were part of the acquisition.

On Monday, the terms of the loan was revised so that JPMorgan will be responsible for the first $1 billion, while the remaining $29 billion will be available as financing to JP Morgan at the Fed’s 2.5% emergency lending rate.

The Fed’s move followed JPMorgan’s change in offer to buy Bear Stearns shares at $10/share instead of $2/share. JP Morgan Chase’s acquisition of Bear Stearns came after a crisis in client confidence placed the firm at risk of bankruptcy.

Possible defenses to pending litigation could include Bear Stearns not knowing how dire its financial health was and its willingness to disclose negative information about the firm, including news that two of its hedge funds collapsed last year.

Please contact Shepherd Smith and Edwards if you are an investor who believes that you are a victim of broker misconduct. Our investment fraud lawyers represent clients living throughout the United States and abroad.

Related Web Resources:

Fed Backs JPMorgan, Bear Stearns Deal, AP, March 24, 2008
JPMorgan Buys Bear Stearns in Fire Sale, The Street, March 17, 2008
Board of Governors of the Federal Reserve System