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From Securities Regulation Daily, January 14, 2014

Derivative suit puts JPMorgan executives in spotlight

By Mark S. Nelson, J.D.

A shareholders’ derivative suit alleges that JPMorgan Chase & Co.’s (JPMorgan) officers and directors breached their fiduciary duties and committed waste by failing to adequately monitor the bank’s residential mortgage-backed securities (RMBS) business and other matters. These failures, the suit alleges, resulted in JPMorgan paying billions in penalties and may expose the bank to criminal liability. The suit asks for unspecified damages and punitive damages. A related suit filed the same day remains under seal (Ratcliff v. Dimon, et al, January 10, 2014).

Meanwhile, JPMorgan reported that its 2013 net income fell $3.4 billion from the prior year to $17.9 billion ($4.35 per share) on full-year revenues of $99.8 billion that were “flat” versus 2012, according to financial results the bank released today. Fourth-quarter 2013 revenues topped $24 billion, a 1 percent drop versus 2012, and yielded net income of $5.3 billion ($1.30 per share). JPMorgan’s shares closed at $57.74, up slightly from yesterday’s trading.

The bank’s 2013 Q-4 results, however, noted an after-tax hit of $1.1 billion for legal expenses. At today’s conference call, CFO Marianne Lake said these items were “partially booked to mortgage, with the remainder booked in corporate, principally the Madoff settlement recently announced.” JPMorgan also said it originated 800,000 mortgages and extended $274 billion in consumer credit last year.

CEO and Chairman Jamie Dimon said the bank had resolved some of its legal woes. “We are pleased to have made progress on our control, regulatory and litigation agendas and to have put some significant issues behind us this quarter. We reached several important resolutions – Global RMBS, Gibbs & Bruns, and Madoff.” Dimon added, “[i]t was in the best interests of our company and shareholders for us to accept responsibility, resolve these issues and move forward.”

Profits over sustainability. According to the complaint, JPMorgan’s officers and directors led the bank into progressively risker business ventures. The complaint said these activities emphasized “short-term profits over long-term sustainability.”

The bank’s RMBS and other ventures also resulted in billions of dollars in civil and other penalties. The complaint cited a $13 billion RMBS settlement and an expected $2 billion settlement related to the Madoff fraud. The complaint also noted other matters involving electricity markets, the London Whale trading losses, settlements with two California public pension funds, potential civil and criminal liability under the Foreign Corrupt Practices Act for the bank’s overseas hiring practices, and a 2003 settlement in the Enron matter.

No demand. No demand has been made on JPMorgan’s board because the complaint said it would be futile to ask the board to consider the matter. According to the complaint, six or more of JPMorgan’s 10 directors are not disinterested.

Moreover, the complaint alleges that Dimon and seven other directors could be subject to a substantial likelihood of personal liability. The complaint, for example, alleged that Dimon “personally oversaw” the bank’s push into the subprime RMBS business.

The complaint also alleges that at least three of the bank’s directors are not independent of Dimon and/or JPMorgan. Director James S. Crown chairs the JPMorgan board’s Risk Policy Committee and is a member of the Board-level Executive Committee. Crown is also president of a family-owned investment company, Henry Crown and Co., that has received loans from JPMorgan and which has leased real estate to JPMorgan, according to the complaint.

Laban P. Jackson, Jr., said the complaint, chairs the board’s Audit Committee and serves on the Board-level Executive Committee. Jackson also is allegedly beholden to Dimon because of Dimon’s ability to control loans the bank can make to Jackson.

Similarly, William C. Weldon, former CEO of Johnson & Johnson (J&J), allegedly is not independent of Dimon or JPMorgan because of loans the bank made to J&J. Weldon chairs the JPMorgan board’s Corporate Governance & Nominating Committee and sits on the Compensation & Management and Board-level Executive Committees.

Claims and relief. The complaint asks the court to hold a jury trial regarding claims for breach of fiduciary duty and corporate waste against all of the named JPMorgan officers and directors.

The complaint asks the court to award unspecified amounts of damages and punitive damages. The complaint also requests restitution and disgorgement, equitable remedies, and prejudgment interest and costs. Specifically, the complaint seeks to reform JPMorgan’s corporate governance.

The case is No. 2:14-cv-00062-WBS-AC.

Attorneys: Roger A. Dreyer (Dreyer Babich Buccola Wood Campora, LLP) for Richard A. Ratcliff, derivatively on behalf of JPMorgan Chase & Co.

Companies: JPMorgan Chase & Co.; Henry Crown and Co.; Johnson & Johnson

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