WILMINGTON, Del. (CN) – A pension fund cannot derivatively sue JPMorgan Chase for the $6.3 billion it lost to high-risk trades attributed to the so-called “London Whale,” a chancery court judge ruled.
Bruno Iskil, the head of Morgan Chase’s Synthetic Credit Portfolio, earned the London Whale nickname when he was blamed for $6.3 billion in losses in 2012, in bad bets on credit default swaps he made for the bank.
Delaware Chancery Court Vice Chancellor Sam Glasscock took the London Whale nickname and ran with it in his lengthy, May 22 ruling.
“The C.W. Morgan is the last surviving ship of the American whaling fleet,” Glasscock began. “In 1820, another ship of the fleet, the Essex, was attacked by a sperm whale, which rammed the ship repeatedly until the planking was sprung and timbers broken. The Essex foundered, utterly destroyed,”
The learned chancellor compared the plight of the Essex to Morgan Chase’s fate at the hands of its own trader.
“Another Morgan was heavily damaged by another whale – the so-called London whale. JPMorgan did not founder, but suffered losses in the billions of dollars,” Glasscock wrote.
The bank paid $920 million to U.S. and U.K. regulators in 2013 for its “unsafe and unsound practices” that led to the scandal.
In a shareholders’ derivative complaint, Asbestos Workers Local 42 Pension Fund sued 22 Morgan Chase executives and board members, including CEO Jamie Dimon, for failing to oversee their traders.
But to do so, the pension fund must show asking the board to take action on behalf of the corporation would be futile – i.e., show that the board is not capable of making an independent decision on the issue, Glasscock wrote.
This issue: “whether the board is unable to exercise its independent business judgment with respect to a lawsuit against certain directors and officers arising out of the losses caused by the London whale trading episode, has been heard, and rejected, by two New York courts. The plaintiff here is collaterally stopped from re-litigating the issue,” Glasscock ruled.
He found no precedent of a successful derivative action against directors for failure to monitor business risk.
“Business risk is the very stuff of which corporate decisions are constituted,” Glasscock wrote. “Where, as here, the allegations are that the level of risk being undertaken by management was reported to the board, and the board acted (or failed to act) in a way that, in hindsight, proved costly to the corporation, and which the derivative plaintiff, with the benefit of hindsight, brands wrongful, it is difficult to see how successful maintenance of that derivative action can be consistent with this jurisdiction’s model of corporate governance, short of circumstances that would support a waste claim.”
Glasscock did not rule on the merits of the claim, but found only that he is precluded from relitigating the issue of demand futility.
Iskil, who is cooperating with investigators and prosecutors, has not been charged in the case. His former boss and a junior trader were charged in 2013 – not with the trades themselves, but for allegedly hiding the size of the losses from management. Attorneys for both men, who are in Europe, deny the charges.
Despite the $6.2 billion in losses attributed to the London Whale, JP Morgan Chase report a record profit of $21.3 billion in that. And the bank said it would cut CEO Jamie Dimon’s 2012 pay in half – to $11.5 million, according to the financial press.
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