Judge Crotty Dismisses Derivative Action against JP Morgan Executives Based on Recent Multi-Billion Dollar Settlements

In a ruling yesterday, Judge Crotty dismissed a derivative action against fifteen JP Morgan Chase current and former executives and board members, including bank chief Jamie Dimon. The complaint alleged that that JP Morgan was damaged by six recent, high profile settlements with government agencies and private litigants that cost the firm billions. The plaintiff, shareholder Chaile Steinberg, brought suit derivatively under a theory of demand futility, alleging that the board members -- each of whom were named defendants -- were not disinterested. Judge Crotty disagreed. He ruled that there was not a “substantial likelihood” that seven of the eight board members (all but Dimon, whom JP Morgan conceded was not disinterested) faced potential liability on any of the claims.

Steinberg argues that the Board purposefully disregarded risks related to the company’s allegedly unlawful practices by failing to monitor or oversee operations. But JPMorgan’s certificate of incorporation specifically immunizes its directors from personal liability for actions taken in good faith, so plaintiff must also plead particularized facts demonstrating that the Board acted with “scienter, i.e., that there was an ‘intentional dereliction of duty’ or ‘a conscious disregard’ for their responsibilities, amounting to bad faith.”  In re Goldman Sachs Grp. Inc. S’holder Litig., No. 5215-VCG, 2011 WL 4826104, at *12 (Del. Ch. Oct. 12, 2011).  To establish bad faith, Steinberg identifies a number of purported “red flags” that should have alerted the Board to the misconduct underlying each of the six investigations. But Steinberg fails to provide particularized facts demonstrating that any of the Outside Directors knew or should have known about any of the alleged “red flags.”

Judge Crotty also ruled that the complaint failed to allege conflicts of interest that would create a reasonable doubt as to the board members’ independence.  As a result, Judge Crotty ruled that the complaint failed to give “particularized facts that create a reasonable doubt that a majority of the Board could have exercised disinterested and independent business judgment in considering demand,” and dismissed the case.