National trial attorneys, Hagens Berman, are encouraging investors of Discover Financial Services (NYSE: NYSE:DFS) who have suffered significant losses to come forward, as a securities fraud lawsuit is currently pending against the company. The firm made this call on Monday.
The class action lawsuit alleges that Discover Financial made false and misleading statements and failed to disclose several issues related to its risk management and compliance procedures. The class period is defined from February 21, 2019, to August 14, 2023, with the lead plaintiff deadline set for October 31, 2023.
According to the allegations, Discover Financial maintained deficient risk management and compliance procedures. Consequently, the company failed to comply with student loan servicing standards, misclassified certain credit card accounts, overcharged customers, and was unable to control its escalating credit card delinquency rate. These issues were expected to expose the company to significant financial exposure, regulatory scrutiny, and reputational harm when revealed.
The truth about these issues started coming out on July 20, 2022. On this day, Discover Financial announced that it was suspending its share repurchase program due to an internal investigation into its student loan servicing practices and related compliance matters. This suspension is noteworthy as management had been aggressively buying back shares, a strategy often seen as a sign of a company's confidence in its future, according to InvestingPro Tips.
Further disclosures followed on July 19, 2023. The company admitted that it had misclassified certain credit card products over approximately a 15-year period due to an acknowledged compliance failure. The correction of these misclassifications had a negative impact on its retained earnings and certain previous interim period net income.
In addition to these revelations, Discover Financial also disclosed that it received a proposed consent order from the Federal Deposit Insurance Corporation (FDIC) in connection with an unrelated regulatory matter.
Finally, on August 14, 2023, Roger C. Hochschild resigned from his position as CEO and President and as a member of the company's board. On the same day, Discover Financial reported a significant increase in its credit card delinquency rate.
"We're focused on investors' losses and are investigating whether DFS may have concealed problems with its compliance and risk management practices," said Reed Kathrein, the Hagens Berman partner leading the investigation.
The firm is also urging whistleblowers with non-public information regarding Discover Financial Services to consider their options to assist in the investigation or take advantage of the SEC Whistleblower program. Under this program, whistleblowers who provide original information may receive rewards totaling up to 30 percent of any successful recovery made by the SEC.
Despite the ongoing lawsuit, Discover Financial Services has a strong record of high earnings quality, with free cash flow exceeding net income, according to InvestingPro Tips. Furthermore, the company's market cap stands at 22.87B USD, with a P/E ratio of 6.3, indicating a relatively low earnings multiple. But it's worth noting that the company's stock has fallen significantly over the last three months, with a three-month price total return of -25.27%, according to InvestingPro's real-time metrics.
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