JP Morgan’s management is facing increasing shareholder derivative lawsuits for the “London Whale” losses, and other fines that have been imposed upon it. The cases in the U.S. District Court, Southern District of New York are In re:JPMorgan Chase & Co Securities Litigation, No. 12-03852; In re: JPMorgan Chase & Co Derivative Litigation, No. 12-03878; and In re: JPMorgan Chase & Co ERISA Litigation, No. 12-04027.
The cases essentially allege that JP Morgan Chase’s management, from Dimon and the Board of Directors on down, failed miserable to properly manage the various risks they were undertaking, leading to over $6 billion in losses in relation to the London Whale trading disaster, to some $20 billion in fines imposed including a more than $13 billion leveed by the federal government.
Judge Daniel of the Southern District of New York dismissed the securities fraud and ERISA actions, and also dismissed claims against the board of directors. But he did maintain the derivative action against Jamie Dimon and Chief Investment Officer Douglas Braunstein among a few others for falsely understating the bank’s “value at risk” in financial statements and reports as well as on analyst phone calls.
A slew of other cases have been dismissed for failing to state claims of fraud essentially because they do not allege facts that show conscious disregard for the truth.
These cases are bringing to the fore a critical question in derivative lawsuits: what has to be alleged in order for a lawsuit that alleges fraud or constructive fraud to go forward? It is not enough to allege negligence, of course, as that would quash fraud claims and put all derivative actions in the world of the business judgment rule–effectively a death knell to those claims.
Everyone should stay tuned as the development in these cases should tell us whether risk management, and truth telling about it, are potential areas where shareholders can hold upper management accountable.