JPMorgan Settles IPO Class Action

It appears JPMorgan Chase (JPM) learned a lesson from the WorldCom litigation.

The bank has become the first Wall Street firm to reach a settlement in the long-running class-action lawsuit into the manipulation of stock sold in initial public offerings.

The nation's third-largest bank confirmed late Thursday that it has reached a tentative deal with the plaintiffs' law firms to pay $425 million to resolve the litigation. The suit alleges that 55 Wall Street investment firms defrauded investors by artificially inflating the value of hundreds of dot-com IPOs in the late 1990s.

JPMorgan is the first bank to reach a settlement in the case. A bank spokesman said the payout would have no "material'' impact on the company.

It's believed the bank has set aside sufficient money in a legal reserve to cover the cost of the settlement, so it won't have to take any charge against earnings.

A year ago, JPMorgan was the last large bank to reach a settlement with shareholders of WorldCom, agreeing to pay $2 billion. But by waiting until the bitter end to strike a deal, the bank made a strategic blunder that ended up costing it more money.

If JPMorgan had settled the WorldCom case in 2004, around the same time as Citigroup (C), it likely would not have had to pay much more than $1.4 billion. JPMorgan miscalculated that it would get off easier by waiting to settle.

However, that proved to be the wrong course of action. That's because the judge in the WorldCom case ruled that JPMorgan, as one of the lone defendants, could potentially be on the hook for up to $10 billion in damages. A few days after that court ruling, the bank agreed to settle.

Now that the plaintiffs' lawyers have reached a tentative deal with JPMorgan, they will probably put pressure on other banks to reach similar settlements.

The deal with JPMorgan comes two years after the plaintiffs' reached a tentative $1 billion settlement with 309 mostly dot-com companies, whose initial public offerings were allegedly manipulated the by the Wall Street firms. One of the companies included in that preliminary deal was TheStreet.com (TSCM), publisher of this Web site.