United States District Court, S.D. New York
CENTRAL LABORERS' PENSION FUND and STEAMFITTERS LOCAL FUND, derivatively on behalf of JPMorgan Chase & Co., Plaintiffs,
JAMES DIMON, LINDA B. BAMMANN, JAMES A. BELL, CRANDALL C. BOWLES, STEPHEN B. BURKE, JAMES S. CROWN, TIMOTHY P. FLYNN, LABAN P. JACKSON, MICHAEL A. NEAL, LEE R. RAYMOND, WILLIAM C. WELDON, WALTER
SHIPLEY, and ROBERT I. LIPP, Defendants, and JPMORGAN CHASE & CO., a Delaware corporation, Nominal Defendant.
OPINION & ORDER
PAUL A. CROTTY, District Judge.
Plaintiffs Central Laborers' Pension Fund and Steamfitters Local 449 Pension Fund ("Plaintiffs"), shareholders of JPMorgan Chase & Co. ("JPMorgan"), bring 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"), abuse of control, corporate waste, and unjust enrichment by the thirteen individual named defendants (collectively, "Defendants"), some of whom are Board members. JPMorgan, a Delaware corporation, is named solely in its derivative capacity. Plaintiffs seek damages suffered by JPMorgan as a result of its business relationship with Bernard L. Madoff Investment Securities LLC ("BMIS"), including JPMorgan's recent deferred prosecution agreement ("DPA") with the U.S. Attorney's Office for the Southern District of New York ("USAO"), in which JPMorgan agreed to pay the government $2.6 billion. Plaintiffs allege that no demand on JPMorgan's Board of Directors (the "Board") 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 Plaintiffs' 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, ten current Board members,  and two former corporate officers/advisers Walter V. Shipley and Robert I. Lipp. All of the directors other than the Chairman/CEO are nonmanagement directors.
JPMorgan had a long standing banking relationship with Bernard Madoff ("Madoff") and BMIS. Since 1992, Madoff deposited almost all of the investment funds received through BMIS into accounts at Chase. Compl. ¶ 17. As we now know, those funds were not used to purchase stocks, options, or other securities for BMIS investors as Madoff had promised; rather, Madoff stole this money by perpetrating the largest Ponzi scheme in financial history. Plaintiffs allege that JPMorgan was well-positioned to identify Madoff's criminal activity because it had access to vast amounts of financial information about BMIS and routinely performed due diligence on BMIS's accounts. Id. ¶ 108. Rather than identifying and reporting Madoff's fraud, however, JPMorgan "turn[ed] a blind eye to Madoff's thievery." Id. ¶ 16. Specifically, Plaintiffs claim that Defendants Shipley and Lipp were repeatedly confronted with significant concerns about irregularities in BMIS's SEC filings, id. ¶¶ 3-12, but chose to ignore these red flags because they feared the loss of the lucrative accounts of BMIS and Norman Levy, a longtime customer of BMIS. Id. ¶¶ 10-12.
On January 6, 2014, JPMorgan entered into a DPA with the USAO regarding its relationship with Madoff. In the DPA, JPMorgan consented to the filing of a two-count Information charging it with violations of the Bank Secrecy Act ("BSA"), 31 U.S.C. § 5311 et seq., for its failure to maintain an effective anti-money laundering program ("AML") and to file a suspicious activity report. See Declaration of David A. Rosenfeld in Opposition to Defendants' Motion to Dismiss ("Rosenfeld Decl."), ECF No. 25, Ex. 1, ¶ 1. JPMorgan also stipulated that the facts included in the DPA's Statement of Facts were true and accurate. See id., Ex. 1, ¶ 2. JPMorgan further agreed to pay $1.7 billion to the United States. See id., Ex. 1, ¶ 7.
On February 19, 2014, Plaintiffs filed a shareholder derivative complaint, seeking damages as a result of JPMorgan's payment of $2.6 billion in penalties and settlements to federal authorities through the DPA and to civil plaintiffs concerning its conduct related to Madoff. Compl. ¶¶ 1, 352. Overall, Plaintiffs assert claims for (1) breach of fiduciary duty for failing to ensure that JPMorgan maintained an effective internal control structure or file a suspicious activity report, (2) violations of Section 14(a) of the Securities Act (solely against the Outside Directors) for failing to disclose information regarding Madoff's activity, (3) abuse of control, (4) corporate waste, and (5) unjust enrichment as a result of Defendants' salary, fees, stock options, and other payments received while breaching their fiduciary duties.
Plaintiffs have not made demand on the current Board because they allege that demand would be futile.
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).
Plaintiffs 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 board's oversight duties are challenged, plaintiff 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). ...