From Securities Regulation Daily, October 16, 2015

Attack on JPMorgan board did not meet ‘exacting’ Caremark standards

By Amy Leisinger, J.D.

A Second Circuit panel affirmed the dismissal of a derivative action filed on behalf of JPMorgan Chase & Co. for failure to plead demand futility. According to the panel, demand was not excused for the board’s risk of personal liability because the plaintiff essentially made a Caremark claim and failed to allege the board consciously disregarded business risks. Under Caremark, “only a sustained or systematic failure of the board to exercise oversight…will establish the lack of good faith that is a necessary condition to liability,” the court found (Wayne County Employees’ Retirement System v. Dimon, October 16, 2015, per curiam).

Background. As part of a series of actions based on JPMorgan’s eased risk limits for a synthetic credit portfolio and associated losses, the plaintiff brought suit on JPMorgan’s behalf alleging breach of fiduciary duty, unjust enrichment, and waste. The plaintiff did not make a demand on the company’s board, citing the board’s failure to properly exercise its oversight duties. The Southern District of New York dismissed the complaint (covered in the Securities Regulation Daily Wrap Up for March 31, 2014), finding that demand was not excused because the plaintiff failed to allege that the board consciously disregarded red flags about the risks of the changes or otherwise failed to monitor the bank’s business risks. The fact that a minority of the board, including CEO James Dimon, may be at risk of personal liability was insufficient to demonstrate a risk to the rest of the board, the court explained. Further, the court found, the complaint lacked sufficient detail as to how the majority of the board could have known of or approved the trades at issue or how those directors were not disinterested or independent.

Demand not excused. The panel noted that the plaintiff contends that it has properly pleaded demand futility because a majority of JPMorgan’s directors consciously disregarded indicators of business risk and failed to meet board oversight responsibilities and that this assertion directly implicates the theory of liability articulated in Caremark. As such, the panel explained, to establish liability, the plaintiff must show that the directors knew they were not discharging their duties or failed to act in the face of a known duty to act. The complaint cites instances in which warning signs reached some members of the board, the panel noted, but one director’s knowledge cannot be imputed to the entire board. In addition, the plaintiff failed to show that the warnings alleged to have been received by the majority of the board were ignored over a sustained period of time. The plaintiff has not pleaded a “sustained or systematic failure of the board to exercise oversight,” and the district court properly dismissed the complaint and did not err in denying leave to amend, the panel concluded.

The case is No. 14-3245.

Attorneys: Thomas G. Amon (Law Offices of Thomas G. Amon) for James Baker. Joseph David Daley (Robbins Geller Rudman & Dowd LLP) for Wayne County Employees Retirement System.

Companies: JPMorgan Chase & Co.

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