Wells Fargo & Company WFC has filed a lawsuit against JPMorgan Chase JPM to recover investor losses stemming from a troubled $481-million commercial real estate loan that was based on a fraudulently inflated financial metric. This was first reported by Reuters.

This legal action reflects the ongoing challenges faced by banks in handling their real estate portfolios, particularly in the situation of economic uncertainty and potential market downturns.

Key Allegations in Lawsuit Filed by WFC

In 2019, JPMorgan made the loan to finance the purchase by the Chetrit Group, a private Manhattan real estate development firm, of 43 multi-family properties with 8,671 apartments in 10 U.S. states for $522 million. 

In a complaint filed in federal court in Manhattan, WFC claims that JPM disregarded financial documents that revealed the seller had exaggerated the properties' historical net operating income by 25%. JPM allegedly knew about the misrepresentation but chose to ignore it because it knew it would be sold in pieces to uninformed investors, according to the lawsuit. The borrower defaulted in 2022 and still owes more than $285 million, resulting in significant financial losses for investors.

Wells Fargo’s Remarks

With its lawsuit, WFC seeks to force JPMorgan to repurchase the loan or pay damages for the financial loss suffered by investors.

Wells Fargo stated, "JPM had an obligation to engage in due inquiry to determine the scope of the fraudulent reporting" after learning about the inflated metric.” “Instead, JPM plowed ahead as if nothing unusual had happened," "without even bothering to correct known errors in the numbers," WFC added.    

Wells Fargo Price Performance & Zacks Rank

WFC shares have gained 31.2% over the past six months compared with the industry’s growth of 14.8%.

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WFC flaunts a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Recent Developments of Major Banks Over Legal Issues

Last week, the U.S. Consumer Financial Protection Bureau dismissed a sweeping lawsuit against JPMorgan, Bank of America BAC and Wells Fargo for failing to protect consumers from fraud on Zelle, the renowned payment network.

The lawsuit described how hundreds of thousands of customers sought assistance and were denied, while some were asked to contact the fraudsters to get back their lost money. Also, Bank of America, JPMorgan and Wells Fargo allegedly failed to look into the complaints properly or offer their clients a legally necessary reimbursement for fraud and errors.

Last month, WFC’s 2018 consent order related to its compliance risk management program was terminated by the Office of the Comptroller of the Currency (“OCC”). 

The consent order dealt with Wells Fargo's auto lending and mortgage practices, in addition to its compliance risk management program. A compliance order pertaining to similar activities was enforced by the Consumer Financial Protection Bureau in collaboration with the OCC. The bank was fined $1 billion, of which $500 million was credited to the OCC to cover the agency's penalty.

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This article originally published on Zacks Investment Research (zacks.com).

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