Published originally by the Journal of Commerce in November 2011.
Proving yet again that shareholders are no longer willing to tolerate systemic shortcomings from those in charge of public companies, the Louisiana Municipal Police Employees Retirement System has filed a shareholders derivative lawsuit in the Southern District of New York[1] against the officers and directors of JPMorgan Chase Bank (Morgan) seeking more than just recovery of the $88.3 million paid by Morgan to settle violations of the Office of Foreign Assets Control (OFAC) regulations regarding transactions involving Cuba, Iran and Sudan. The lawsuit claims those officers and directors should have to repay the settlement amount, the cost of any remedial measures, as well as damage to the bank’s goodwill and the costs of the increased regulatory scrutiny, all based upon assertions of breach of fiduciary duty, unjust enrichment, gross mismanagement and waste of corporate assets.
There are two issues which make this lawsuit noteworthy. First, while Occupy Wall Street is played out on the streets, this case reinforces the impatience of shareholders who are no longer willing to allow the wasting of corporate money, especially when it involves significant violations of U.S. law. How the case will turn out remains to be seen since it was just filed in September 2011. However, this case proves yet again that when a company faces allegations from the government, it needs to make sure it has current and adequate internal controls in place, but when it does not, it must be careful what is conceded in the compromise agreement.
Morgan’s OFAC settlement included references to over 1,700+ wire transfers involving Cuban citizens and funds transfers totaling $178.5 million. These Cuban Assets Control Regulations violations were notified by another bank to Morgan which then began its own investigation. The result was Morgan confirmed the violations occurred as reported and so filed a voluntary self-disclosure. However, according to OFAC, Morgan did not take adequate steps to stop the practice, something which is a basic rule when violations are discovered and self-reported. What seems readily apparent is the sheer quantity of violations are likely the result of a lack of internal controls.
There was also a transaction involving Iran. Specifically, OFAC asserted Morgan violated the Weapons of Mass Destruction Proliferators Sanctions Regulations in the course of arranging a $2.9 million trade loan to a bank issuer of a letter of credit for a transaction involving a vessel affiliated with an Iranian shipping company that had been sanctioned by OFAC. When Morgan realized a violation had occurred, it waited three (3) months to submit the disclosure. The timing obviously irked OFAC, perhaps in part because the disclosure was mailed only three (3) days before Morgan was to receive repayment. Further, OFAC asserted Morgan failed to provide complete documentation in response to an OFAC administrative subpoena.
Further, there apparently were issues involving the Reporting, Procedures and Penalties Regulations in that OFAC claimed Morgan failed to produce several documents requested by OFAC regarding a wire transfer referencing Khartoum, Sudan. The problem here was flunking the attitude test, i.e., you do not allow a government regulator to conclude you are not producing all the required documents in response to an administrative subpoena.
As is the norm when cases settle, information about the case was published. OFAC characterized the violations as “egregious” which means a particularly serious violation of law occurred, at least from the agency’s perspective. A serious violation leads to strong enforcement which translates into a significant fine. Such language obviously caught the ear of the retirement fund which decided to do something about it.
The Louisiana Municipal Police Employees Retirement System accused Morgan’s board of directors of knowingly allowing the alleged illegal transactions that led to the August 25 settlement with OFAC. “The present board embraced or recklessly disregarded the companywide business strategy based upon repeated and systematic violations of federal law, safety regulation and company policy,” the retirement fund said in the complaint. “By permitting these violations of law to continue … over a prolonged period after being put on notice numerous times, the board utterly failed to exercise adequate oversight over JPMorgan.” Such language proves once again, the maxim learned most recently during the Clinton administration. The fault lies not just what occurred, but rather, it was compounded by the failure to quickly admit the misdeeds, fix them and move on.
This Morgan lawsuit comes on the heels of one filed in July 2009 in the Southern District of Texas against Panalpina along with certain current and former officers and directors and owners, all of whom were in place prior to its 2005 IPO. There were issues about bribes and other questionable payments made to Nigeria government officials having to do with the energy business which brought Panalpina unwanted publicity and fines. When Panalpina withdrew from Nigeria, its stock price fell considerably. The complaint sought damages for violations of the Securities Act, fraud and negligent misrepresentation.
This action against Panalpina is in addition to a qui tam action pending in the same judicial district in Texas. In this second case, damages and penalties are being sought under the False Claims Act and common law, in addition to penalties under the Anti-kickback Act. A qui tam or whistleblower action arises when a private citizen (individual or company) brings to the attention of the government violations of law which the government chooses at the time not to investigate or prosecute. The government is permitted to change its mind once the claim rises to the level of a lawsuit, as here. For at least six (6) months, and often longer, the case remains sealed while the government conducts its investigation. At some point, the government will make a decision about whether or not to proceed with the case. If it chooses to do so, the party bringing “original information” about the violation to the government’s attention is entitled to an award which is measured as a portion of the whole recovered from the violator. If the government declines to prosecute, the complaining party may proceed with the suit on his own behalf and gets all the damages awarded and recovered.
Regarding the Foreign Corrupt Practices Act violations which gave rise to the shareholder lawsuit, Panalpina pled guilty to certain charges. Its Swiss parent, Panalpina World Transport, entered into a deferred prosecution agreement. The total fine imposed was $70.56 million. That’s enough of a sum to get anyone’s attention, especially investors whose return on investment was seen by them as seriously compromised through the events which occurred.
The odds are one or both cases will settled, some 95% of all cases do. The question is how long will it take and at what cost to both sides? It is also interesting to speculate about whether the outcome would be any different if the Dodd-Frank whistleblower provisions had been in place when the original complaint was made to the government.
[1] Louisiana Municipal Police Employees Retirement System v. Dimon et al. (S.D.N.Y. Sept. 6, 2011, Case No. 1:2011cy06231.