JPMorgan Chase must face a lawsuit from shareholders accusing it of securities fraud by misleading them about its ability to manage risk, which surfaced when it lost US$6.2 billion ($7.1 billion) in the "London Whale" scandal.
US District Judge George Daniels in Manhattan said shareholders could pursue claims that JPMorgan, chief executive Jamie Dimon and former chief financial officer Douglas Braunstein knowingly hid the increased risks that the bank's chief investment office had been taking in early 2012.
In separate decisions also issued on Monday, the judge also dismissed a lawsuit brought against JPMorgan directors, and a lawsuit by employees over their losses from investing in the bank's stock in their retirement accounts.
The US$6.2b loss was linked to trades by Bruno Iksil, a French national who had worked in a bank office in London.
Daniels said shareholders may pursue claims that the bank, Dimon and Braunstein committed fraud by materially understating the bank's "value at risk", and misleading them on an April 13, 2012 earnings call when Dimon labelled as a "tempest in a teapot" reports about a synthetic credit portfolio that Iksil managed.
"The statements were material as they were made immediately after the financial news media revealed that (the) CIO had amassed a huge position in exotic derivative instruments, and defendants were attempting to reassure investors that those trades were under control," Daniels wrote.
"Plaintiffs have adequately alleged that defendants Dimon and Braunstein knew fact or had access to information suggesting that their public statements were not accurate," he added.
Daniels also dismissed claims against three other JPMorgan officials: Ina Drew, who led the CIO; Mike Cavanagh, who preceded Braunstein as CFO; and Barry Zubrow, who had been the bank's chief risk officer.
JPMorgan spokesman Brian Marchiony declined to comment.
OTHER LAWSUITS DISMISSED
The securities lawsuit was led by pension funds in Arkansas, Ohio, Oregon and Sweden, and seeks class-action status on behalf of the bank's stockholders from February 24, 2010 to May 21, 2012.
Jay Eisenhofer and Gerald Silk, lawyers for the plaintiffs, did not immediately respond to requests for comment. Dan Tierney, a spokesman for Ohio Attorney General Mike DeWine, said his office is reviewing the decision.
In the directors' case, Daniels rejected claims by the Wayne County Employees' Retirement System in Detroit that JPMorgan's board improperly condoned the CIO's risk-taking, citing a lack of evidence that it "consciously disregarded red flags".
He also dismissed claims brought on behalf of employees that including the bank's stock as an investment option in retirement plans was imprudent, finding "no allegations of when, or even that, JPMorgan was in dire circumstances."
David Rosenfeld, a lawyer for the Wayne County pension plan, did not immediately respond to a request for comment.
Jacob Zamansky, a lawyer for the employees, said: "We respectfully disagree with Judge Daniels' opinion, and are considering our options on appeal."
The US Supreme Court will on Wednesday hear arguments in a similar case involving Fifth Third Bancorp.
Last year, JPMorgan agreed to pay more than US$1b to settle US and British regulatory probes into the London Whale losses, and admitted wrongdoing.
Two traders at the bank, Javier Martin-Artajo and Julien Grout, were indicted in September for allegedly hiding losses linked to Iksil. Both have been fighting those charges.