Tuesday, May 26, 2015

JPMorgan Fights Off Another Suit Over Its Failure to Control the London Whale

By Matthew Garza, J.D.

A derivative suit filed by a pension fund against officers and directors of JPMorgan Chase for their role in failing to maintain control of the “London Whale” was dismissed by the Delaware Court of Chancery in an opinion released late Thursday afternoon. The shareholder asserted Caremark claims against the board, but the court held that the pension fund showed no evidence indicating that it was exempt from making a demand on the bank’s board. Because the demand issue had been litigated and a decision reached in multiple courts, the pension fund was precluded from relitigating the issue in the Chancery Court (Asbestos Workers Local 42 Pension Fund v. Bammann, May 21, 2015, Glasscock, S.).

Background. By the end of 2012, Bruno Iksil, aka the London Whale, had lost more than $6 billion while serving in his role as head trader of JPMorgan’s Synthetic Credit Portfolio group. Iksil’s trading has been highlighted by regulators as prohibited under the Volcker Rule. The bank has entered into settlements with the SEC, the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC), and the UK Financial Conduct Authority (FCA) for $920 million. The Office of Inspector General for the Federal Reserve Board and Consumer Financial Protection Bureau took a critical look at the supervisory effectiveness of both the Fed and the New York Fed in an October 17, 2014, report.

The fund said the bank’s failure to heed red flags about Iksil’s trading showed breaches of the duty of loyalty. The court gave a detailed summary of the allegations contained in the 212-page complaint and concluded that the pension fund pleaded issues identical to the issues presented in two New York actions, and dismissed the case as subject to collateral estoppel. The court said that at oral argument the pension fund raised an argument that collateral estoppel should not apply because the complaint was filed after five agency decisions adverse to JPMorgan had been made, including one where it was forced to admit fault by the SEC. But because the argument was raised late in the proceedings and the bank had not had a chance to respond, the court waived the argument.

The case is C.A. No. 9772-VCG.