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Halpert Enterprises, Inc. v. Harrison

February 14, 2007

HALPERT ENTERPRISES, INC., DERIVATIVELY ON BEHALF OF J.P. MORGAN CHASE & CO., PLAINTIFF,
v.
WILLIAM B. HARRISON, JR., HANS W. BECHERER, RILEY P. BECHTEL, FRANK A. BENNACK, JR., LAWRENCE A. BOSSIDY, M. ANTHONY BURNS, H. LAURANCE FULLER, ELLEN V. FUTTER, WILLIAM H. GRAY, III, HELENE L. KAPLAN, LEE R. RAYMOND, JOHN R. STAFFORD, LLOYD D. WARD, MARINA V. N. WHITMAN, JOHN H. OPINION BIGGS, WILLIAM C. WELDON, STEPHEN B. AND ORDER BURKE, JAMES S. CROWN, JAMES DIMON, LABAN P. JACKSON, JR., JOHN W. KESSLER, ROBERT I. LIPP, RICHARD A. MANOOGIAN, AND DAVID C. NOVAK, DEFENDANTS, AND J.P. MORGAN CHASE & CO., A DELAWARE CORPORATION, NOMINAL DEFENDANT.



The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge

Plaintiff Halpert Enterprises, Inc. ("Plaintiff" or "Halpert") brings this shareholders' derivative action against William Harrison and other directors, officers, and members of the Board of Directors of J.P. Morgan Chase & Co. (collectively, "Defendants"). Halpert alleges derivative claims for breach of fiduciary duty, gross mismanagement, corporate waste, and violation of Section 14(a) of the Securities Exchange Act of 1934. The claims stem from Defendants' alleged failure to prevent J.P. Morgan Chase & Co. ("J.P. Morgan") from engaging in a series of activities, such as transactions with Enron and Worldcom, that eventually cost J.P. Morgan over $4 billion in fines, civil litigation costs, and settlements.

Defendants move to dismiss Plaintiff's derivative claims pursuant to Fed. R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 23.1. Defendants also move on alternate grounds to dismiss Halpert's Section 14(a) claim as a matter of law. Defendants additionally request that I dismiss Plaintiff's complaint with prejudice to amend. Judge Stein has, on two prior occasions, dismissed Plaintiff's complaint relating to the same subject matter.

Because Plaintiff's complaint does not meet the requirements of Fed. R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 23.1, I must dismiss it in its entirety. Because amendment would be futile, I am dismissing Plaintiff's complaint with prejudice.*fn1

I. BACKGROUND

The following facts are taken from Plaintiff's Complaint, the J.P. Morgan Audit Committee Report on which the Complaint relies,*fn2 and pleadings and opinions in prior litigation between these two parties.

A. Halpert's First Complaint

Halpert brought two previous complaints in this district before Judge Sidney Stein relating to the subject matter of his instant lawsuit.

On November 27, 2002, Halpert, a J.P. Morgan shareholder, filed his first derivative suit against Harrison and the other directors, officers, and members of the Board of Directors (the "Board"). Defendant's Memorandum of Law in Support of Motion to Dismiss, at 4 ("Def. Mot."). Halpert's first complaint alleged derivative claims for breach of fiduciary duty, gross mismanagement, and corporate waste, as well as a claim for violation of Section 14(a) of the Securities Exchange Act of 1934 for failure to disclose material liabilities in SEC filings. All of Halpert's causes of action arose from the Board's alleged failure to prevent J.P. Morgan from participating in fraudulent "forward transactions" with Enron Corporation, which triggered massive regulatory fines and civil litigation. See Halpert Enter. v. Harrison, 362 F. Supp.2d 426, 428 (S.D.N.Y. 2005) ("Halpert I"). At that point in time, Halpert had not made a demand on J.P. Morgan's Board to sue its directors. Halpert claimed instead that such demand would be futile. Halpert I, 362 F. Supp.2d at 429.

On March 28, 2005, Judge Stein dismissed Halpert's claims with leave to amend. Judge Stein held that the Halpert "failed to allege with particularity the futility of making a demand on the Board of Directors," as required for derivative actions by Fed. R. Civ. P. 23.1. Halpert I, at 433. Halpert's "complaint contain[ed] merely conclusory allegations that [did] not raise a reasonable doubt as to the Board's independence and disinterestedness and its exercise of reasonable business judgment." Id. at 432.

B. Halpert's Second Complaint

On May 2, 2005, Halpert filed an amended complaint against J.P. Morgan re-alleging the same derivative claims. The complaint contained Halpert's Enron-related allegations, as well as six additional allegations that J.P. Morgan's Board: 1) failed to conduct sufficient due diligence to uncover the massive fraud at WorldCom; 2) failed to prevent the funding of illegal market timing of mutual funds; 3) failed to prevent the improper recommendation of mutual fund class B shares to investors, in violation of National Association of Securities Dealers ("NASD") rules; 4) failed to adequately separate investment banking and research functions of J.P. Morgan, in violation of NASD, New York Stock Exchange ("NYSE"), and SEC rules; 5) failed to prevent violations of SEC and NYSE rules related to underwriting IPOs; and 6) failed to prevent the destruction of documents requested by the SEC in connection with an investigation of J.P. Morgan. See Halpert Enter. v. Harrison, 2005 U.S. Dist. LEXIS 15022 (S.D.N.Y. July 26, 2005) ("Halpert II"). Again, Halpert did not make a demand on J.P. Morgan's Board to sue its directors, claiming instead that such demand would be futile. Halpert II at *3.

Again, Judge Stein dismissed Halpert's complaint. Judge Stein held that despite the additional allegations of wrongdoing, Halpert failed to sufficiently amend his complaint to state facts with particularity that established demand futility, as required by Rule 23.1. Halpert II, 2005 U.S. Dist. LEXIS 15022 at *9. Judge Stein also specifically dismissed Halpert's Section 14(a) claim as a matter of law. Id. at *8-9.

C. Halpert's Demand Letter

On October 3, 2005, Halpert sent a demand letter to J.P. Morgan's Board. Def. Mot., at 6. In addition to the seven allegations of wrongdoing listed in Halpert's second complaint, the demand letter added an eighth charge that the Board failed to prevent J.P. Morgan from charging excessive fees to arrange financing for Jefferson County, Alabama. Id. Specifically, Halpert's letter demanded that J.P. Morgan initiate suit against all Members of the Board of Directors and senior Officers who served J.P. Morgan between 1997 and 2005, seeking remuneration in the form of millions of dollars of ...


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