(CN) - The 2nd Circuit affirmed dismissal of a shareholder class action accusing JPMorgan Chase of creating a phantom entity to funnel loans to Enron so that Enron could disguise the loans as revenue.
The federal appeals court in New York said the shareholders failed to provide evidence that JPMorgan intended to defraud its own investors, rather than Enron's shareholders.
The plaintiffs alleged that JPMorgan created the company Mahonia Ltd. to make loans to Enron. Enron then reported the Mahonia loans as revenue from prepaid commodity trades, concealing debt from investors, the lawsuit claimed.
Shareholders said JPMorgan "earned exorbitant fees" through the lending process.
Judge Paul Kelly acknowledged that the Senate's investigation showed JP Morgan Chase "knowingly engaged in and actively assisted Enron in its sham transactions; the resulting disclosures caused JPMC's stock to suffer significant losses."
But the appellate court affirmed dismissal of the case, saying allegations alone are insufficient to state a claim unless coupled with evidence of fraudulent intent.
"Plaintiffs fail to show an intent to defraud JPMC's shareholders rather than Enron's shareholders," Kelly wrote. "Even if JPMC was actively engaged in duping other institutions for the purposes of gaining at the expense of those institutions, it would not constitute a motive for JPMC to defraud its own investors."
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