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Can the Lawsuit Against DoJ Over JPM Settlement Succeed?

Stocks in this article: JPM

Better Markets also gets a little cute when saying "not if JP Morgan Chase's liability was $200 billion or more," because they can just throw out the figure without proving anything.

But there's no question that Better Markets has raised some excellent points.

Better Markets -- founded by and funded by Michael Masters, who also founded Masters Capital Management, LLC. -- made quite a splash in September 2009, when the organization said the financial crisis had cost the U.S. economy nearly $13 trillion.

Rafferty Capital Markets analyst Richard Bove -- who has previously said that JPMorgan's executives and board of directors weren't fulfilling their responsibilities to protect shareholders when entering into such a large settlement -- wrote in a note to clients Tuesday, "have no idea how the District Court in Washington will respond to this request but I do know that the plaintiffs are in the right and the Justice Department has violated every tenet of fairness and equity in its actions."

"The Justice Department and State Attorney Generals have argued their cases through press leaks to a media that has abdicated its requirement to act objectively," Bove wrote. We made that same point at TheStreet last August.

Bove in his usual succinct manner, also wrote, "The shareholders of JPMorgan Chase were being fined for actions that they did not commit," adding, "The supposed miscreants in these actions were not being fined or subjected to legal scrutiny."

The analyst went further by saying large banks were being "extorted" by "a McCarthyite Justice Department."

The pattern of leaks, meant to maximize headlines before, during and after settlements has indeed been disturbing.

So Better Markets and Bove together are making a good case against the Justice Department and other government authorities that their actions against the banks have been a bit over the top, with bank executives not suffering as their shareholders suffer.

Too Bad It Won't Fly

But the lawsuit against the Justice Department is likely to be tossed, for the simple reason that the agreement with JPMorgan was made before the DoJ or other government authorities represented on the Residential Mortgage-Backed Securities Working Group sued the bank.

Judge Jed Rakoff of the Federal District Court in Manhattan famously objected to a settlement between Bank of America (BAC) and the Securities and Exchange Commission in 2009, however, he had authority over the settlement, since the SEC had sued the bank. The same thing happened with a settlement between Citigroup (C) and the SEC in 2011.

But the JPMorgan Chase situation is different, because there was no lawsuit.

Bove commended Better Markets: "Amen, brother; well said. Shareholders have rights which no one in this settlement cared to consider."

It's too bad that in this case, no judge will be able to do anything for JPMorgan's shareholders. Then again, the shareholders could try and do something themselves.

Additional Comment from Frank Mayer

Frank Mayer, a partner in the Financial Services Practice Group of Pepper Hamilton in Philadelphia, said the following about the Better Markets lawsuit during a phone conversation Wednesday:

Better Markets should realize that this is a policy issue, which would be best addressed in Congress, which could potentially provide Better Markets with a Forum.  The judicial branch lacks jurisdiction over an executive branch, absent the U.S. government, via Congress, expressly waiving sovereign immunity.

In addition, it's unlikely that Better Markets would prevail, because it is unlikely they can prove that their organization, as plaintiff, has been directly harmed by the settlement, and the courts are very reluctant to interfere with prosecutorial discretion.  The Department of Justice has the authority to enforce the law under their jurisdiction, and therefore has the authority to settle and resolve.

There are other important powerful defenses that the government would have, as well.

Mayer added that the lawsuit "has certainly added to the publicity of the settlement."

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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