UPDATE 2-LPS shares drop after Reuters Special Report

Mon Dec 6, 2010 5:07pm EST

* LPS problems more serious than it disclosed-report

* Shares close at $29.23 (Adds options details, updates share price)

NEW YORK Dec 6 (Reuters) - Lender Processing Services Inc's LPS.N shares fell as much as 9.8 percent on Monday after a Reuters Special Report said the company, which helps banks manage mortgage foreclosure documentation, faces more serious legal troubles than it previously disclosed.

In options markets, investors snatched up contracts that protect against further declines in LPS's share price.

The Reuters Special Report said that LPS had produced more improper foreclosure documents than the company had previously let on. [ID:nN06230361]

LPS works for 14 of the 15 biggest mortgage payment collectors in the United States, including banks such as JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N).

The company has said a subsidiary is under federal criminal investigation and admitted that employees at a small subsidiary had falsely signed foreclosure documents.

But the Reuters Special Report said that unit had produced more documents of dubious authenticity than LPS had disclosed, and that other parts of the company had also engaged in questionable practices with foreclosure documents.

"There is some strong language and heavy wording in the Reuters story that could scare shareholders not already familiar with the company," said Carter Malloy, a research analyst at investment bank and brokerage Stephens.

LPS's shares closed down 5.77 percent at $29.23 on Monday after trading as low as $28.07. Since LPS's shares closed at $43.99 in October 2009, they have lost more than a third of their value.

Malloy sees the company as still fundamentally strong. His target price for LPS shares is $42, based on valuations for the company's peers, historical valuations and his cash flow forecasts.

In the options markets, investors braced for the company's shares to drop, with a total of 5,753 put options trading during the session, compared with just 541 call options, according to options analytics firm Trade Alert. Put options allow investors to profit from share drops, while call options perform well if shares rise. (Reporting by Dan Wilchins, Additional reporting by Doris Frankel in Chicago; editing by Phil Berlowitz and Andre Grenon)

FILED UNDER: