JP Morgan Chase 2010 Annual Report Download - page 282

Notes to consolidated financial statements
282 JPMorgan Chase & Co./2010 Annual Report
Note 32 – Litigation
As of December 31, 2010, the Firm and its subsidiaries are defen-
dants or putative defendants in more than 10,000 legal proceed-
ings, in the form of regulatory/government investigations as well as
private, civil litigations. The litigations range from individual actions
involving a single plaintiff to class action lawsuits with potentially
millions of class members. Investigations involve both formal and
informal proceedings, by both governmental agencies and self-
regulatory organizations. These legal proceedings are at varying
stages of adjudication, arbitration or investigation, and involve
each of the Firm’s lines of business and geographies and a wide
variety of claims (including common law tort and contract claims
and statutory antitrust, securities and consumer protection claims),
some of which present novel claims or legal theories.
The Firm believes the estimate of the aggregate range of reasona-
bly possible losses, in excess of reserves established, for its legal
proceedings is from $0 to approximately $4.5 billion at December
31, 2010. This estimated aggregate range of reasonably possible
losses is based upon currently available information for those
proceedings in which the Firm is involved, taking into account the
Firm’s best estimate of such losses for those cases for which such
estimate can be made. For certain cases, the Firm does not believe
that an estimate can currently be made. The Firm’s estimate in-
volves significant judgment, given the varying stages of the pro-
ceedings (including the fact that many of them are currently in
preliminary stages), the existence of multiple defendants (including
the Firm) in many of such proceedings whose share of liability has
yet to be determined, the numerous yet-unresolved issues in many
of the proceedings (including issues regarding class certification
and the scope of many of the claims), and the attendant uncer-
tainty of the various potential outcomes of such proceedings.
Accordingly, the Firm’s estimate will change from time to time, and
actual losses may be more than the current estimate.
Set forth below are descriptions of the Firm’s material legal pro-
ceedings.
Auction-Rate Securities Investigations and Litigation. Beginning in
March 2008, several regulatory authorities initiated investigations
of a number of industry participants, including the Firm, concerning
possible state and federal securities law violations in connection
with the sale of auction-rate securities. The market for many such
securities had frozen and a significant number of auctions for those
securities began to fail in February 2008.
The Firm, on behalf of itself and affiliates, agreed to a settlement in
principle with the New York Attorney General’s Office which pro-
vided, among other things, that the Firm would offer to purchase at
par certain auction-rate securities purchased from J.P. Morgan
Securities LLC (“JPMorgan Securities”; formerly J.P. Morgan Securi-
ties Inc.), Chase Investment Services Corp. and Bear, Stearns & Co.
Inc. by individual investors, charities and small- to medium-sized
businesses. The Firm also agreed to a substantively similar settle-
ment in principle with the Office of Financial Regulation for the
State of Florida and the North American Securities Administrator
Association (“NASAA”) Task Force, which agreed to recommend
approval of the settlement to all remaining states, Puerto Rico and
the U.S. Virgin Islands. The Firm has finalized the settlement
agreements with the New York Attorney General’s Office and the
Office of Financial Regulation for the State of Florida. The settle-
ment agreements provide for the payment of penalties totaling $25
million to all states. The Firm is currently in the process of finalizing
consent agreements with NASAA’s member states; over 40 of these
consent agreements have been finalized to date.
The Firm also faces a number of civil actions relating to the Firm’s
sales of auction-rate securities, including a putative securities class
action in the United States District Court for the Southern District of
New York that seeks unspecified damages, and individual arbitrations
and lawsuits in various forums brought by institutional and individual
investors that, together, seek damages totaling more than $200
million relating to the Firm’s sales of auction-rate securities. One
action is brought by an issuer of auction-rate securities. The actions
generally allege that the Firm and other firms manipulated the market
for auction-rate securities by placing bids at auctions that affected
these securities’ clearing rates or otherwise supported the auctions
without properly disclosing these activities. Some actions also allege
that the Firm misrepresented that auction-rate securities were short-
term instruments. The Firm has filed motions to dismiss each of the
actions, which are being coordinated before the Southern District.
These motions are currently pending.
Additionally, the Firm was named in two putative antitrust class
actions in the United States District Court for the Southern District
of New York. The actions allege that the Firm, along with numerous
other financial institution defendants, colluded to maintain and
stabilize the auction-rate securities market and then to withdraw
their support for the auction-rate securities market. In January
2010, the District Court dismissed both actions. The Second Circuit
Court of Appeals consolidated the two appeals. That appeal is
currently pending.
Bear Stearns Hedge Fund Matters. Bear Stearns, certain current or
former subsidiaries of Bear Stearns, including Bear Stearns Asset
Management, Inc. (“BSAM”) and Bear, Stearns & Co. Inc., and
certain current or former Bear Stearns employees are named defen-
dants (collectively the “Bear Stearns defendants”) in multiple civil
actions and arbitrations relating to alleged losses of more than $1
billion resulting from the failure of the Bear Stearns High Grade
Structured Credit Strategies Master Fund, Ltd. (the “High Grade
Fund”) and the Bear Stearns High Grade Structured Credit Strate-
gies Enhanced Leverage Master Fund, Ltd. (the “Enhanced Lever-
age Fund”) (collectively, the “Funds”). BSAM served as investment
manager for both of the Funds, which were organized such that
there were U.S. and Cayman Islands “feeder funds” that invested
substantially all their assets, directly or indirectly, in the Funds. The
Funds are in liquidation.
There are currently four civil actions pending in the United States
District Court for the Southern District of New York relating to the
Funds. Two of these actions involve derivative lawsuits brought on
behalf of purchasers of partnership interests in the two U.S. feeder