United States District Court, S.D. New York
CHAILE STEINBERG, derivatively on behalf of JPMorgan Chase & Co., Plaintiff,
JAMES DIMON, ELLEN V. FUTTER, JAMES S. CROWN, DAVID M. COTE, JAMES A. BELL, CRANDALL C. BOWLES, LABAN P. JACKSON, JR., WILLIAM H. GRAY, III, DAVID C. NOVAK, STEPHEN B. BURKE, LEE R. RAYMOND, WILLIAM C. WELDON, DOUGLAS L. BRAUNSTEIN, MICHAEL J. CAVANAGH, and INA R. DREW, Defendants, JPMORGAN CHASE & CO., Nominal Defendant.
OPINION & ORDER
PAULA. CROTTY, District Judge.
Plaintiff Chaile Steinberg ("Steinberg"), a shareholder of JPMorgan Chase & Co. ("JPMorgan"), brings this derivative action for damages due to alleged breaches of fiduciary duty, violations of Section 14(a) of the Securities Exchange Act of 1934 (the "Securities Act"), waste of corporate assets, and unjust enrichment by the fifteen individual named defendants ("Defendants"), some of whom are Board members. JPMorgan, a Delaware corporation, is named solely in its derivative capacity. Steinberg claims that JPMorgan was damaged by a series of six recent, high profile settlements with government agencies and private litigants arising out of allegations of egregious misconduct. Steinberg alleges that no demand on JPMorgan's Board of Directors was necessary because such demand would be futile.
Defendants now move to dismiss because the Complaint fails to allege with particularity facts sufficient to excuse Steinberg's failure to make demand upon the Board prior to filing the derivative action. The Court agrees, and therefore GRANTS Defendants' motion to dismiss.
The defendants are the Chief Executive Officer and Chairman of the Board James Dimon, seven current and four former Board members (collectively, the "Director Defendants"),  and three current or former corporate officers. All of the Director Defendants other than the Chairman/CEO are or were outside, non-management directors.
Steinberg claims that Defendants knowingly or recklessly permitted JPMorgan to "embark on [an] unprecedented course of reckless and unlawful conduct in order to increase their own personal fortunes." Compl. ¶ 4. Specifically, Steinberg bases the claims on misconduct allegedly uncovered as a result of the following governmental investigations or private litigations: (1) a July 2013 settlement with the Federal Energy Regulatory Commission regarding alleged manipulative bidding in the electricity market, Compl. ¶¶ 48-51, (2) a 2013 investigation by the Securities and Exchange Commission into a hiring program under which certain positions were allegedly given to family members of Asian business owners and officials (the "Sons and Daughters Program"), id. ¶¶ 52-57, (3) a September 2013 settlement with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency regarding billing practices and allegedly erroneous documents filed in delinquent debtor lawsuits, id. ¶¶ 63-64, (4) a December 2013 settlement with European Union regulators regarding alleged manipulation of the London Interbank Offered Rate, id. ¶ 69, (5) a January 2014 deferred prosecution agreement with the U.S. Attorney's Office for the Southern District of New York ("USAO") relating to Bernard L. Madoff Investment Securities LLC, id. ¶ 71, 75, 94, and (6) 2013 settlements of private litigation arising out of the origination and securitization of residential mortgage-backed securities ("RMBS"), id. ¶¶ 97-98, 100-05. Steinberg also alleges that the Defendants made a number of misrepresentations and omissions in their securities filings and proxy statements. Overall, since 2009, JPMorgan has paid nearly $32 billion in penalties, and Steinberg seeks damages as a result of JPMorgan's payment of those penalties. Id. ¶ 2.
Based on these six occurrences, Steinberg asserts the following claims: (1) breach of fiduciary duty for failing to implement adequate internal controls and issuing misleading statements, (2) violation of Section 14(a) of the Securities Act for causing to be issued misleading statements in the 2011, 2012, and 2013 proxy statements, (3) waste of corporate assets against the Defendants for failing to implement adequate internal procedures and improper compensation of JPMorgan's executive officers and directors, and (4) unjust enrichment against the Defendants as a result of the compensation they received while breaching their fiduciary duties.
Steinberg claims no demand was made on the current Board due to its futility since a majority of the Board is "not disinterested and cannot fairly and adequately evaluate any demand made on the JPMorgan Board of Directors." Id. ¶ 206.
I. Legal Standard
Federal Rule of Civil Procedure 23.1(b) requires that a shareholder bringing a derivative suit state with particularity plaintiff's efforts "to obtain the desired action from the directors or comparable authority, " ( i.e., make demand), and "the reasons for not obtaining the action or not making the effort, " ( i.e., futility). In determining whether demand is required or excused, the Court applies the substantive law of Delaware, JPMorgan's state of incorporation. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 98-99 (1991).
Under Delaware law, the cause of action or claim belongs to the corporation. See Cantor v. Sachs, 162 A. 73, 76 (Del. Ch. 1932). A shareholder's right to "prosecute a derivative suit is limited to situations where the [shareholder] has demanded that the [nominal defendant's] directors pursue the corporate claim and they have wrongfully refused to do so or where demand is excused because the directors are incapable of making an impartial decision regarding such litigation." Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). "[T]he demand requirement... exists at the threshold, first to insure that a stockholder exhausts his intracorporate remedies, and then to provide a safeguard against strike suits, " in "recognition of the fundamental precept that directors manage the business and affairs of corporations." Aronson v. Lewis, 473 A.2d 805, 811-12 (Del. 1984).
Steinberg must show the futility of making demand by adequately alleging that the directors were "incapable of making an impartial decision regarding the pursuit of the litigation." Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). Where a plaintiff challenges a board's oversight duties, he or she must plead particularized facts that "create a reasonable doubt that, as of the time the complaint [was] filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand." Rales, 634 A.2d at 934. A plaintiff creates a reasonable doubt solely by demonstrating that a majority of the Board's members are interested. See Rattner v. Bidzos, No. Civ.A. 19700, 2003 WL 22284323, at *13 (Del. Ch. Oct. 7, 2003). ...