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From Securities Regulation Daily, July 17, 2014

JPMorgan board members sidestep derivative suit

By Matthew Garza, J.D.

A derivative suit brought on behalf of JPMorgan Chase against Jamie Dimon and 14 other current and former board members was dismissed because of a failure to make a demand on the board. The plaintiff did not establish that various troubles encountered by the bank in the last two years showed that board members faced personal liability and therefore could not use their independent judgment in considering a litigation demand (Steinberg v. Dimon, July 16, 2014, Crotty, P.)

Conduct. The plaintiff claimed Dimon and the other defendants knowingly or recklessly allowed JPMorgan to “embark on [an] unprecedented course of reckless and unlawful conduct in order to increase their own personal fortunes.” The actions that drew the plaintiff’s ire included a number of governmental investigations and settlements. These included a July 2013 settlement with the Federal Energy Regulatory Commission for manipulative bidding in the electricity market, an SEC investigation into the bank’s “Sons and Daughters” program, which gave jobs to family members of Asian business owners and officials, a 2013 settlement with the CFPB and the OCC over billing practices in delinquent debtor lawsuits, a December 2013 settlement with EU regulators over LIBOR manipulation, the January 2014 deferred prosecution agreement stemming from the Madoff Ponzi scheme, and settlements arising from the bank’s activity in securitizing residential mortgage-backed securities.

These actions amounted to a breach of the board members’ fiduciary duties for failing to maintain sufficient internal controls, the plaintiff claimed. They also allegedly led to misleading statements in proxy statements issued in 2011, 2012, and 2013, in violation of Exchange Act Section 14(a), unjust enrichment of the board members, and a waste of corporate assets. Demand on the board members would be futile, the plaintiff asserted, because they were not disinterested and could not fairly evaluate any demand. The court recounted that to show demand futility, the plaintiff must show directors were incapable of making an impartial decision regarding pursuit of the litigation.

The parties conceded that Jamie Dimon was an interested board member but the court ruled that seven other outside directors who were on the board at the time the complaint was filed did not face a substantial likelihood of liability for the alleged misconduct, and could not be considered interested. The mere threat of personal liability is not enough to render a director interested, the court reasoned.

Pleadings insufficient. The claims based on the board members’ failure to monitor the company and its internal controls, known as a Caremark claim, were insufficiently pleaded, ruled the court. Assertions that the board members’ conduct amounted to bad faith, or an intentional dereliction of duty, fell short because the plaintiffs did not provide sufficient facts showing that any of the board members ignored red flags. An email from a senior Hong Kong executive regarding the Sons and Daughters program may establish that executive’s scienter, the court said, but not that of the board. Claims regarding misleading proxy statements were also insufficiently pleaded because the plaintiff did not establish scienter. The claims based on waste of corporate assets also fell short, leading the court to conclude that there was no a substantial likelihood that any of the outside directors could be held liable, and no reasonable doubt that the board could have exercised disinterested and independent business judgment in considering a demand.

The case is No. 14 Civ. 688 (PAC).

Companies: JPMorgan Chase & Co.

Attorneys: Peter George Safirstein (Morgan & Morgan PC) for Chaile Steinberg, derivatively on behalf of JPMorgan Chase & Co. Emil A. Kleinhaus (Wachtell Lipton Rosen & Katz) for James Dimon.

MainStory: TopStory CorporateGovernance FraudManipulation DirectorsOfficers NewYorkNews Proxies

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