City of Providence, Rhode Island v. Dimon ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CITY OF PROVIDENCE, RHODE ISLAND,
derivatively on behalf of JPMORGAN CHASE
& CO.,
Plaintiff,
v. C.A. No. 9692 - VCP
JAMES DIMON, JAMES A. BELL,
CRANDALL C. BOWLES, STEPHEN B.
BURKE, DAVID M. COTE, JAMES C.
CROWN, ELLEN V. FUTTER, TIMOTHY P.
FLYNN, LABAN P. JACKSON, JR., DAVID
C. NOVAK, LEE R. RAYMOND, WILLIAM
C. WELDON, ROBERT I. LIPP, WILLIAM
LANGFORD, NINA NICHOLS, and
MARTHA GALLO,
Defendants,
-and-
JPMORGAN CHASE & CO.,
Nominal Defendant.
MEMORANDUM OPINION
Date Submitted: March 10, 2015
Date Decided: July 29, 2015
Seth D. Rigrodsky, Esq., Brian D. Long, Esq., Gina M. Serra, Esq., Jeremy J. Riley, Esq.,
RIGRODSKY & LONG, P.A., Wilmington, Delaware; Jeffrey M. Padwa, Esq., CITY
OF PROVIDENCE, RHODE ISLAND, Providence, Rhode Island, Frederic S. Fox, Esq.,
Jeffrey P. Campisi, Esq., Damien H. Weinstein, Esq., KAPLAN FOX & KILSHEIMER
LLP, New York, New York, Attorneys for Plaintiff City of Providence, Rhode Island.
Gregory P. Williams, Esq., Catherine G. Dearlove, Esq., Christopher H. Lyons, Esq.,
RICHARDS, LAYTON & FINGER P.A., Wilmington, Delaware; John F. Savarese,
Esq., Emil A. Kleinhaus, Esq., C. Lee Wilson, Esq., WACHTELL, LIPTON, ROSEN &
KATZ, New York, New York; Attorneys for Defendants James Dimon, Robert I. Lipp,
William Langford, Nina Nichols, Martha Gallo, and Nominal Defendant JPMorgan
Chase & Co.
David C. McBride, Esq., William D. Johnston, Esq., YOUNG CONAWAY STARGATT
& TAYLOR, LLP, Wilmington, Delaware; Stuart J. Baskin, Esq., Jaculin Aaron, Esq.,
SHEARMAN & STERLING LLP, New York, New York; Attorneys for Defendants
James A. Bell, Crandall C. Bowles, Stephen B. Burke, David M. Cote, James S. Crown,
Ellen V. Futter, Timothy P. Flynn, Laban P. Jackson, Jr., David C. Novak, Lee R.
Raymond, and William C. Weldon.
PARSONS, Vice Chancellor.
The plaintiff brings this action derivatively on behalf of JPMorgan Chase & Co.,
alleging that the company‘s board of directors and other officer and employee defendants
breached their fiduciary duties through failures of oversight. In particular, the complaint
points to a series of costly settlements and consent orders that the company entered into
with various government regulators in the last five years, all of which relate to alleged
violations of federal anti-money laundering statutes and regulations.
The defendants moved to dismiss the complaint, contending that it is barred by res
judicata, because at least one prior action in the U.S. District Court for the Southern
District of New York arose out of the same series of transactions as the plaintiff‘s claims
here. That action, also prosecuted derivatively on JPMorgan‘s behalf, was dismissed for
failure to plead demand futility. The defendants further contend that collateral estoppel
bars the plaintiff from re-litigating the issue of demand excusal as it relates to the
company‘s board. Finally, the defendants argue that, even if I were to address the merits
of the complaint, I should dismiss it for failure to plead that demand is excused as futile.
The plaintiff counters by asserting that because the claims it brings are not the same as
those in the prior New York action, neither claim nor issue preclusion applies here. The
plaintiff also asserts that its complaint, unlike those in the prior actions, adequately pleads
that a majority of the directors face a substantial likelihood of liability for their failures of
oversight, and that demand is excused on that basis.
For the reasons stated herein, I conclude that the plaintiff‘s claims in this case
arose out of the same series of transactions as the prior New York action. Based on the
New York law of res judicata, therefore, I must dismiss the complaint in its entirety. In
1
light of this conclusion, I do not reach the defendants‘ other grounds for dismissal, nor do
I address the separate motion to dismiss filed by three of the defendants who contest
whether this Court has personal jurisdiction over them.
I. BACKGROUND1
A. Parties
Plaintiff, City of Providence, Rhode Island, brings this derivative action on behalf
of the nominal defendant, JPMorgan Chase & Co. (―JPMorgan‖ or the ―Company‖), a
Delaware corporation. Plaintiff continuously has owned JPMorgan common stock at all
relevant times.
Defendants are current and former directors, officers, and employees of
JPMorgan. Defendants James Dimon, James A. Bell, Crandall C. Bowles, Stephen B.
Burke, James C. Crown, Timothy P. Flynn, Laban P. Jackson, Lee R. Raymond, and
William C. Weldon (together, the ―Board‖) are members of JPMorgan‘s board of
directors. Except for Dimon, the Company‘s Chairman and CEO, all of the Director
Defendants are outside, non-management directors. Defendants David M. Cote, Ellen V.
Futter, David C. Novak, and Robert I. Lipp (the ―Former Directors,‖ and collectively
with the Board, the ―Director Defendants‖) previously were members of JPMorgan‘s
board. Defendant Martha Gallo was the Company‘s Executive Vice President and
1
Unless otherwise noted, the facts are drawn from the well-pled allegations of
Plaintiff‘s Verified Shareholder Derivative Complaint (the ―Complaint‖), and
documents attached or integral thereto.
2
General Auditor between 2006 and 2011, at which time she became Head of Global
Compliance and Regulatory Management.2
B. Facts
Plaintiff charges Defendants with breaching their fiduciary duties in connection
with JPMorgan‘s failure to comply with U.S. Bank Secrecy Act and Anti-Money
Laundering (―BSA/AML‖) laws and regulations, as well as U.S. laws and regulations
prohibiting certain transactions with countries and entities that had connections to
terrorism and money laundering, like Cuba, the Islamic Republic of Iran, and the
Republic of the Sudan. The crux of the Complaint is that, because of Defendants‘ failure
to oversee the Company‘s operations and compliance during the ―Relevant Period‖
(January 1, 2005, through January 7, 2014), the Company‘s reputation has been damaged,
and its stockholders have had to bear the cost of over $2 billion in fines and penalties. In
particular, and as recited in more detail below, Plaintiff contends that Defendants‘
oversight failures caused JPMorgan to enter into five settlements and consent orders with
federal regulators: (1) an August 2011 settlement with the U.S. Department of the
Treasury‘s Office of Foreign Asset Controls or ―OFAC‖ (the ―OFAC Settlement‖); (2) a
2
William H. Gray, a former director of the Company, also was named as a
Defendant, but has been voluntarily dismissed from the case. Docket Item (―D.I.‖)
No. 11. The Complaint also named as Defendants two other JPMorgan
employees, William Langford and Nina Nichols. They, along with Defendant
Gallo, moved to dismiss the Complaint as it relates to them for lack of personal
jurisdiction. Plaintiff did not oppose that motion as it related to Langford and
Nichols. Pl.‘s Answering Br. in Opp. to Def.‘s Mot. to Dismiss for Lack of
Personal Jurisdiction 1 n.1. I therefore dismiss the Complaint as it relates to those
two Defendants.
3
January 2013 consent order with the Treasury‘s Office of the Comptroller of the
Currency or ―OCC‖ (the ―2013 OCC Consent‖); (3) a January 2013 consent order with
the Federal Reserve Board (the ―Fed Consent‖); (4) a January 2014 Deferred Prosecution
Agreement with the U.S. Attorney‘s Office for the Southern District of New York (the
―DPA‖); and (5) a January 2014 consent order with the OCC (the ―2014 OCC
Consent‖).3
1. Relevant statutory and regulatory regime
In 1970, Congress passed the Currency and Foreign Transactions Reporting Act,
commonly known as the ―Bank Secrecy Act,‖ which established requirements for
recordkeeping and reporting by private individuals, banks, and other financial
institutions. The 1986 Money Laundering Control Act and the 1992 Annunzio-Wylie
Anti-Money Laundering Act added to the Bank Secrecy Act‘s enforcement regime by
imposing criminal liability on individuals or financial institutions that assist in laundering
money or engage in transactions designed to avoid anti-money laundering reporting
requirements. Since 1996, these provisions have required banking organizations to file a
―Suspicious Activity Report‖ (or ―SAR‖) whenever they detect a known or suspected
criminal violation of the BSA/AML laws and regulations. The International Money
Laundering Abatement and Anti-Terrorist Financing Act, included as part of the 2001
USA-PATRIOT Act, further enhanced the federal BSA/AML regime.
3
E.g., Compl. ¶¶ 6-12; id. Ex. A (the OFAC Settlement); id. Ex. B (the 2013 OCC
Consent); id. Ex. C (the Fed Consent); id. Ex. D (the DPA); id. Ex. E (the 2014
OCC Consent).
4
Various federal government agencies play a role in enforcing the BSA/AML
statutes, and implementing further regulations, but the Complaint focuses on the role of
OFAC, the Financial Crimes Enforcement Network (―FinCEN‖), and the federal banking
agencies—the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the National Credit Union Administration, the Office of Thrift
Supervision, and the OCC.4 As relevant here, the federal banking agencies require each
bank under their supervision to establish and maintain a BSA/AML compliance program.
Pursuant to the USA-PATRIOT Act, a similar requirement is imposed by FinCEN.
Criminal and civil monetary penalties can be sought against individuals and organizations
for violating the BSA/AML laws.
In addition to its role within the BSA/AML regulatory infrastructure, OFAC
administers and enforces U.S. economic and trade sanctions relating to targeted foreign
countries, terrorist organizations, international drug traffickers, and organizations
involved in proliferating weapons of mass destruction. Referring to these requirements
as ―U.S. Economic Sanctions,‖ the Complaint alleges that they are ―separate and distinct
from the BSA,‖ but ―share a common national security goal.‖5
4
E.g., Compl. ¶ 55.
5
Id. ¶ 66; see also, e.g., id. ¶¶ 1, 3, 6.
5
2. The Company fails to comply with the relevant laws and regulations
The Complaint describes in detail JPMorgan‘s programs and policies designed to
ensure compliance with the BSA/AML laws and U.S. Economic Sanctions. 6 The
cornerstones of the Company‘s compliance regime were its ―Know Your Customer‖ or
―KYC‖ standards and its monitoring and screening of transactions to detect potentially
risky individuals and entities. According to the Complaint, however, JPMorgan‘s KYC
policies and monitoring were ineffective during the Relevant Period. One key failure that
allegedly was brought to the attention of the Audit Committee of the Board—which was
responsible for oversight of the Company‘s compliance—was inadequate management
oversight of its KYC and due diligence processes.7 As a result, the Company repeatedly
failed to make timely referrals of suspicious activities as contemplated by the BSA/AML
regulations.8 Additionally, the Company failed adequately to screen for individuals and
entities blacklisted by the U.S. Economic Sanctions.9
a. The OFAC Settlement
Plaintiff alleges that the Company apparently violated U.S. Economic Sanctions
on numerous occasions during the Relevant Period. For example, JPMorgan made a
trade loan in December 2009 relating to a vessel affiliated with the blacklisted Islamic
6
Id. ¶¶ 72-98.
7
Id. ¶¶ 112, 201-206.
8
Id. ¶¶ 174-175, 187, 230-233.
9
Id. ¶¶ 99, 124, 130, 157, 160-162.
6
Republic of Iran Shipping Lines.10 That and other violations allegedly were reported to
the Board contemporaneously. Moreover, throughout this period, Audit Committee
reports allegedly show that the Company knew about various weaknesses in its Global
AML policies and U.S. Economic Sanctions compliance.
The alleged violations also came to the attention of federal regulators. On August
25, 2011, OFAC disclosed that JPMorgan had agreed to pay $88.3 million to settle
potential claims for civil liability for non-compliance with the U.S. Economic
Sanctions.11
b. The 2013 OCC and Fed Consents
Plaintiff alleges that within a month of the OFAC Settlement, an update provided
to the Audit Committee reported that rather than improving, the Company‘s due diligence
programs geared toward OFAC and BSA/AML compliance in fact had ―deteriorated.‖12
The Complaint alleges that in the ensuing months, JPMorgan and the Board attempted to
grapple with these continuing difficulties. In January 2013, however, the Company
entered into a consent order with the OCC, which recited its findings that JPMorgan was
deficient in its BSA/AML compliance.13 Specifically, the 2013 OCC Consent
highlighted the Company‘s failure to correct previously reported problems and to file
Suspicious Activity Reports as required by the regulations. Further, the Consent Order
10
Id. ¶¶ 153-159.
11
Id. ¶ 183; OFAC Settlement ¶ 11.
12
Compl. ¶ 192.
13
Id. ¶¶ 216-217; 2013 OCC Consent.
7
criticized generally the Company‘s lack of organization-wide internal controls and
monitoring, and specifically its OFAC compliance.14
Contemporaneous with the 2013 OCC Consent, the Company also executed a
similar consent order with the Federal Reserve Board.15 Neither the 2013 OCC Consent
nor the Fed Consent resulted in a fine or penalty, but both identified remedial measures
JPMorgan agreed to take to address deficiencies in its BSA/AML and U.S. Economic
Sanctions compliance procedures. Both Consents called for the Company to develop an
action plan and continue to report back to the relevant agencies about its progress in
improving its regulatory compliance functions.
c. The DPA and the 2014 OCC Consent
According to Plaintiff, examinations conducted after the execution of the 2013
OCC Consent and the Fed Consent revealed continuing violations on JPMorgan‘s part.
On January 7, 2014, the Company entered into another consent order with the OCC. The
2014 OCC Consent incorporated the findings from 2013, and added information about
different violations.16 In connection with the 2014 OCC Consent, JPMorgan agreed to
pay a $350 million civil penalty.
The 2014 OCC Consent came one day after a substantially larger penalty was
imposed on the Company. On January 6, 2014, JPMorgan and the U.S. Attorney for the
Southern District of New York entered into the DPA, in which the Company accepted
14
2013 OCC Consent 4, 8-12, 20-22.
15
Fed Consent 1.
16
2104 OCC Consent 1-2.
8
responsibility for alleged misconduct described in a criminal ―Information‖ filed against
it, as well as a lengthy and detailed ―Statement of Facts.‖17 The Information, which
resembles a complaint in format and substance, and the Statement of Facts both relate to
the BSA/AML laws and regulations. Unlike the 2013 and 2014 OCC Consents, however,
they focus primarily on JPMorgan‘s involvement in the Ponzi scheme orchestrated by
Bernard L. Madoff. The Information and Statement of Facts indicate that the Company‘s
actions in that regard violated several provisions of the BSA/AML statutes and
regulations.18 For example, JPMorgan failed to file SARs in connection with Madoff,
even though the bank allegedly knew at some point before the Ponzi scheme collapsed
that something probably was amiss. The DPA also linked the Madoff-related compliance
failures to the Company‘s general failure to establish an adequate anti-money laundering
program.
In addition to formally accepting responsibility for the conduct enumerated in the
Information and the Statement of Facts, JPMorgan agreed in the DPA to cooperate with
the U.S. Attorney and the Federal Bureau of Investigation in connection with those
matters. The DPA required JPMorgan to continue its ―ongoing effort to implement and
maintain an effective BSA/AML compliance program in accordance with the
requirements of the BSA and the directives and orders of any United States regulator . . .
17
DPA Exs. B-C.
18
See id.
9
including without limitation the OCC and Federal Reserve Board, as set forth in‖ the
2013 OCC Consent and the Fed Consent.19
Finally, and most notably, the DPA required JPMorgan to pay a fine of $1.7
billion dollars. That sum represents the bulk of the more than $2 billion in stockholder
money that Plaintiff alleges has been paid to settle claims relating to the Company‘s
inadequate BSA/AML compliance system during the Relevant Period.
3. Stockholder derivative litigation ensues
Shortly after the announcement of the DPA, several stockholder derivative actions
were commenced. On February 3, 2014, Chaile Steinberg, a JPMorgan stockholder, filed
a derivative action against certain defendants (including the Company‘s Board members)
for breaches of fiduciary duty, violations of Section 14(a) of the Securities Exchange Act
of 1934, waste of corporate assets, and unjust enrichment (the ―Steinberg Action‖).20
Steinberg claimed JPMorgan ―was damaged by a series of six recent, high profile
settlements with government agencies and private litigants arising out of allegations of
egregious misconduct,‖ one of which was the DPA.21 The other five bases for
Steinberg‘s claims appear to be unrelated to the DPA or to each other. They include: (1)
a $410 million payment based on allegations that a JPMorgan energy subsidiary
manipulated energy prices; (2) a report of federal authorities investigating alleged
improprieties in JPMorgan‘s hiring program; (3) a combined $389 million payment for
19
DPA 6.
20
See Steinberg v. Dimon, 2014 WL 3512848, at *1 (S.D.N.Y. July 16, 2014).
21
Id.
10
Consumer Financial Protection Bureau and OCC penalties and refunds relating to claims
that JPMorgan unfairly charged customers for credit-monitoring products; (4) a combined
$2.4 billion in fines paid to the European Union and Japan for alleged manipulation of
LIBOR-based benchmark interest rates; and (5) a combined $17.5 billion in settlements
with institutional investors and the U.S. Department of Justice to resolve claims
stemming from the subprime mortgage crisis.22
On February 19, 2014, a second derivative action against JPMorgan‘s Board was
filed in the Southern District of New York by the Central Laborers‘ Pension Fund and the
Steamfitters Local 449 Pension Fund (the ―Central Laborers‘ Action‖).23 Like the
Steinberg Action, the Central Laborers‘ Action included claims for breaches of fiduciary
duty, violations of the Securities laws, corporate waste, and unjust enrichment.24 Unlike
Steinberg‘s, however, the Central Laborers‘ complaint was more focused, relying
primarily on the DPA and the related allegations concerning the Madoff Ponzi scheme.25
Indeed, counsel for the plaintiff in the Central Laborers‘ Action apparently interviewed
Madoff via telephone and in person several times before the announcement of the DPA
22
Compl. ¶¶ 44-173, Steinberg v. Dimon, No. 14 Civ. 688(PAC), 2014 WL 3512848
(S.D.N.Y. July 16, 2014).
23
Cent. Laborers’ Pension Fund v. Dimon, 2014 WL 3639185, at *1 (S.D.N.Y. July
23, 2014).
24
Id. at *2.
25
Id. at *1-2.
11
and filing of the Central Laborers‘ complaint.26 Thus, I find that factual allegations
pertaining to the Madoff Ponzi scheme and JPMorgan‘s failures in that connection
permeate the Central Laborers‘ complaint.27
In July 2014, both the Steinberg Action and the Central Laborers‘ Action were
dismissed for failing adequately to plead that demand upon the JPMorgan Board was
excused as futile.28 In both cases, the court held that the plaintiff had failed to
demonstrate that the director defendants faced a ―substantial likelihood‖ of liability such
that it would have been reasonable to doubt that the Board could have exercised
disinterested and independent judgment in considering a demand.29 In both cases, the
court found that the plaintiffs critically failed to allege facts suggesting that the Board
was aware of the ―red flags‖ the plaintiffs identified,30 which knowledge would have
26
E.g., Compl. ¶¶ 5, 14, Cent. Laborers’ Pension Fund v. Dimon, No. 14 Civ.
1041(PAC), 2014 WL 3639185 (S.D.N.Y. July 23, 2014).
27
See Cent. Laborers’ Pension Fund, 2014 WL 3639185, at *1 (―Plaintiffs allege
that JPMorgan was well-positioned to identify Madoff‘s criminal activity because
it had access to vast amounts of financial information about BMIS and routinely
performed due diligence on BMIS‘s accounts. Rather than identifying and
reporting Madoff‘s fraud, however, JPMorgan ‗turn[ed] a blind eye to Madoff‘s
thievery.‘ Specifically, Plaintiffs claim that Defendants Shipley and Lipp were
repeatedly confronted with significant concerns about irregularities in BMIS‘s
SEC filings, but chose to ignore these red flags because they feared the loss of the
lucrative accounts of BMIS and Norman Levy, a longtime customer of BMIS.‖)
(citations omitted).
28
Id. at *6; Steinberg, 2014 WL 3512848, at *5.
29
Cent. Laborers’ Pension Fund, 2014 WL 3639185, at *3-4; Steinberg, 2014 WL
3512848, at *3-4.
30
Cent. Laborers’ Pension Fund, 2014 WL 3639185, at *4 (―Here, Plaintiffs point to
a number of alleged red flags surrounding BMIS, without showing that the
12
been necessary to establish a substantial likelihood of liability for the Caremark31 claims
the plaintiffs sought to prosecute derivatively on the Company‘s behalf.
C. Procedural History and Parties’ Contentions
Plaintiff served a demand for books and records on JPMorgan‘s Board in January
2013, in response to which the Company provided approximately 5,000 pages of
documents. Plaintiff commenced this action on May 23, 2014. The Complaint charges
all Defendants with a failure of oversight rising to the level of a breach of fiduciary duty
under this Court‘s Caremark decision. According to Plaintiff, Defendants knew the
Company‘s efforts to remediate its BSA/AML deficiencies were unsuccessful, and yet
allowed the Company‘s compliance systems to deteriorate further, ultimately resulting in
over $2 billion in regulatory fines and penalties.32
Outside Directors had knowledge of these red flags. Plaintiffs allege, for instance,
that BMIS‘s Financial and Operational Combined Uniform Single Reports
contained major discrepancies that were detected by JPMorgan employees. But
Plaintiffs do not allege that any of the Outside Directors were ever told about these
discrepancies. As a result, any alleged red flags are insufficient to demonstrate
bad faith on the part of the Outside Directors and therefore cannot demonstrate a
substantial likelihood of liability for the Caremark claims.‖) (citations omitted);
Steinberg, 2014 WL 3512848, at *3 (―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.‘ For example, the
Complaint refers to various internal reports and communications, but never alleges
that the Board ever saw these documents.‖) (citations omitted).
31
See In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
32
E.g., Pl.‘s Answering Br. [hereinafter ―PAB‖] 1-5.
13
Defendants seek dismissal of the Complaint in its entirety. In support of their
motion they contend that: (1) the New York law of collateral estoppel precludes Plaintiff
from litigating the issue of demand futility as it relates to JPMorgan‘s Board; (2) the New
York law of res judicata bars Plaintiff from bringing derivative claims arising out of the
Company‘s BSA/AML and U.S. Economic Sanctions violations during the Relevant
Period; and (3) even if Plaintiff could litigate its derivative claims here, the Complaint
should be dismissed for failure adequately to plead that demand is excused as futile.
Plaintiff counters the first two arguments, in part, by contending that the
allegations contained in its Complaint are different from those raised by the plaintiffs in
the previous lawsuits.33 Regarding the question of collateral estoppel, Plaintiff further
emphasizes the differences between its derivative Complaint and others previously filed
by JPMorgan stockholders, arguing that a finding of collateral estoppel against it would
be improper because it has not had a full and fair opportunity to litigate the demand
futility issue. Finally, Plaintiff asserts that dismissal under Rule 23.1 is not warranted
here because demand is excused as futile, because Plaintiff‘s allegations support a
reasonable inference that a majority of the Director Defendants either face a substantial
risk of liability, or are conflicted and cannot consider a demand.
II. ANALYSIS
I first consider Defendants‘ argument that res judicata bars Plaintiff from bringing
this action. Because I conclude that Plaintiff‘s claims are precluded under the doctrine of
33
PAB 20-24, 29-31.
14
res judicata, I do not address Defendants‘ second and third arguments, relating to
collateral estoppel and demand futility. Nor do I reach the separate motion to dismiss,
which asserts that this Court lacks personal jurisdiction over Defendant Gallo. Because
Plaintiff is precluded from bringing any derivative claim relating to the Company‘s
BSA/AML and U.S. Economic Sanctions violations during the Relevant Period, Gallo‘s
separate motion to dismiss is moot.
A. Legal Standard
The Full Faith and Credit Clause of the United States Constitution and the Full
Faith and Credit Act have ―long been understood to encompass the doctrines of res
judicata, or ‗claim preclusion,‘ and collateral estoppel, or ‗issue preclusion.‘‖34 Thus,
this Court is required to give a judgment from another jurisdiction the same preclusive
effect that it would be given by the court rendering the judgment. 35 While neither the
Full Faith and Credit Clause nor the related statute explicitly apply when the court
rendering judgment is a federal court, the U.S. Supreme Court has held that a state court
must give a federal judgment the same force and effect as it would be given under the
preclusion law of the state in which the federal court sits.36
In this case, both of the prior judgments in the cases Defendants cite in support of
their preclusion argument—i.e., Steinberg and Central Laborers’—are judgments of the
34
San Remo Hotel, L.P. v. City & Cty. of S.F., 545 U.S. 323, 336 (2005); U.S. Const.
art. IV, § 1; 28 U.S.C.A. § 1738 (West 2015).
35
Pyott v. La. Mun. Police Emps.’ Ret. Sys., 74 A.3d 612, 615 (Del. 2013).
36
Id. at 615-16 (citing Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508
(2001)).
15
U.S. District Court for the Southern District of New York. This Court, therefore, is
required to give the judgments in Steinberg and Central Laborers’ the same force and
effect as each of them would be afforded in New York courts under the New York law of
preclusion.37 The Delaware Supreme Court has applied these principles in the same legal
context presented in this case, holding that, once a court of competent jurisdiction has
issued a final judgment, a successive case is governed, under the full faith and credit
doctrine, by the principles of collateral estoppel and res judicata rather than by demand
futility law.38 Thus, I apply New York law to analyze the parties‘ res judicata arguments.
B. Under New York Law, the Complaint is Barred by Res Judicata
Under New York res judicata law, a party may not litigate a claim ―where a
judgment on the merits exists from a prior action between the same parties involving the
same subject matter. The rule applies not only to claims actually litigated but also to
claims that could have been raised in the prior litigation.‖39 As relevant here, under New
York law, the dismissal of a derivative action for failure to plead demand futility is a final
judgment on the merits for purposes of res judicata.40 Thus, the only questions I must
37
Id. at 616.
38
Id.
39
In re Hunter, 827 N.E.2d 269, 274 (N.Y. 2005) (internal quotation marks and
citations omitted).
40
Henik ex rel. LaBranche & Co. v. LaBranche, 433 F. Supp. 2d 372, 379 (S.D.N.Y.
2006) (applying New York law) (―[I]t is concluded that the issue of whether or not
the [corporation‘s] board of directors did not lack the disinterestedness and
independence needed to consider a demand—albeit technically a procedural issue
of standing to proceed derivatively—does constitute ‗a decision on the merits‘ for
the purposes of preclusion.‖).
16
address are whether either of the prior actions involved the same parties and the same
subject matter as this case. I conclude that the Steinberg and Central Laborers‘ Actions
both involved the same parties as this case. I next conclude that the subject matter of this
case is the same as that of, at least, the Central Laborers‘ Action. Because Defendants
have shown that those two required elements are satisfied, they are entitled to dismissal
of the Complaint on res judicata grounds.
1. Same parties
Under New York law, a later stockholder asserting derivative claims on behalf of a
corporation is considered to be the ―same plaintiff‖ as a different stockholder asserting
those claims on behalf of the corporation in a separate action.41 Assuming the subject
matter of the claims is the same, res judicata will bar the later stockholder from stating a
derivative claim if the previous claim was dismissed for failure to plead demand futility.
Both the Steinberg Action and the Central Laborers‘ Action involved stockholder
derivative plaintiffs purporting to bring suit against the Board on behalf of JPMorgan.
Thus, under New York law, the plaintiff in this case is the ―same plaintiff‖ as the plaintiff
in the Steinberg and Central Laborers‘ Actions for purposes of preclusion.42 Here, the
41
Id. at 381 (―Therefore, it is concluded that although Henik and Lewis were not
named Plaintiffs in the Brown action, there is nothing differentiating the standing
analysis to be undertaken from that done so in Brown, and preclusive effect shall
be given to the Brown dismissal.‖).
42
Id.; see also id. at 380 (―It makes no difference, in the absence of fraud or
collusion, that a stockholder‘s suit is prosecuted by one or more, or by all, the
stockholders; the suit being brought on behalf of all others of like interest joining
therein. . . . [T]he action is really the action of all the stockholders, as it is
necessarily commenced in their behalf and for their benefit. And as in such suits
17
City of Providence makes no serious attempt to contend that it is a different plaintiff than
those in the Steinberg and Central Laborers‘ Actions. Instead, it asserts in conclusory
fashion that it is ―a different stockholder, bringing different claims, relying on facts that
were not even known to the plaintiffs in the prior actions.‖43 Even accepting those
premises as true, however, they are insufficient to avoid the conclusion that Plaintiff here
is the same as in the prior actions under long-settled New York law holding that a prior
judgment dismissing a stockholder derivative complaint ―is conclusive not only upon the
stockholders who brought the suit but upon the corporation also and upon those who had
the right to intervene but did not avail themselves of it.‖44 Thus, Defendants have
satisfied this element of the res judicata analysis.
2. Same subject matter
Under New York‘s ―transactional analysis‖ approach to res judicata, ―once a claim
is brought to a final conclusion, all other claims arising out of the same transaction or
series of transactions are barred, even if based upon different theories or if seeking a
the wrong to be redressed is the wrong done to the corporation and as the
corporation is a necessary part[y] to the suit, it inevitably follows that there can be
but one adjudication on the rights of the corporation.‖) (quoting Dana v. Morgan,
232 F. 85, 89 (2d Cir. 1916)).
43
PAB 30. I note that Plaintiff neither briefed nor argued whether Defendants here
are the same as the defendants in the Steinberg and Central Laborers‘ Actions, or
if they are not the same, whether any such distinction matters under New York‘s
law of res judicata. I therefore deem any argument Plaintiff might have raised in
this regard to be waived. Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del.
1999).
44
Dana, 232 F. at 89.
18
different remedy.‖45 If a successive action seeks ―what is essentially the same relief for
harm arising out of the same or related facts such as would constitute a single factual
grouping,‖ the second action will be barred by res judicata, notwithstanding ―that the
theories involve materially different elements of proof,‖ or that ―alternative theories are
available [on which] to recover.‖46 Taking all allegations in the Complaint as true, and
drawing reasonable inferences in favor of Plaintiff, I am convinced that its Complaint is
barred because the claims it advances arise out of the same series of transactions that
were at issue in the Central Laborers‘ Action.47
The essence of Plaintiff‘s Complaint is that the Board faces a substantial
likelihood of liability for its bad faith oversight failures in relation to the Company‘s
BSA/AML and U.S. Economic Sanctions compliance. The ―series of transactions‖ that
the Complaint identifies as giving rise to those Caremark claims are, as discussed above,
45
Hunter, 827 N.E.2d at 274.
46
O’Brien v. City of Syracuse, 429 N.E.2d 1158, 1160 (N.Y. 1981) (quotation marks
and citations omitted).
47
If Defendants had been able to rely only on the Steinberg Action as the basis for
their res judicata argument, the question might have been closer. As noted above,
the Steinberg Action reflects a kitchen-sink approach to pleading, in which
multiple unrelated instances of alleged wrongdoing were thrown rather
perfunctorily into the same complaint. But, one of the instances of wrongdoing
included therein was the DPA, which is a major aspect of Plaintiff‘s Complaint
here, and (as I discuss infra) appears to be inextricably linked to the OFAC
Settlement, the 2013 OCC Consent, the Fed Consent, and the 2014 OCC Consent.
In any event, because the Central Laborers‘ Action was exclusively about the
DPA, I focus my preclusion analysis on that case, and consider it duplicative to
analyze separately whether the Steinberg Action also might provide a basis for
barring this Complaint under New York‘s res judicata doctrine.
19
the OFAC Settlement, the 2013 OCC Consent, the Fed Consent, the DPA, and the 2014
OCC Consent. The DPA, however, also was the centerpiece of the Central Laborers‘
cause of action. Theoretically, if the DPA was not a part of one ―series of transactions‖
that also includes the OFAC Settlement, the 2013 OCC Consent, the Fed Consent, and
the 2014 OCC Consent, Plaintiff here might not be barred from prosecuting claims that
arose from those other transactions, even if the Central Laborers’ judgment would bar it
from re-litigating any DPA-related claims. The relevant inquiry, therefore, is whether the
DPA can be separated from the other settlements and consent orders and treated as a
distinct ―factual grouping,‖48 such that the claims relating to the other settlements and
consent orders might avoid preclusion. I conclude that it cannot, for two reasons.
First, the DPA itself indicates that, rather than relating solely to the Madoff Ponzi
scheme, that settlement was part and parcel of JPMorgan‘s overall resolution of
continuing BSA/AML and OFAC compliance violations that had given rise to the
previous settlements and consent orders. To begin with, even the Madoff-related
allegations in the DPA were themselves BSA/AML violations: in connection with the
Madoff situation, the government accused the Company of violating provisions of the
U.S. Code and federal regulations that I discussed in Section I.B.1 supra as part of the
BSA/AML regulatory infrastructure.49 For example, one allegation was that JPMorgan
failed to file a Suspicious Activity Report in connection with Madoff, as required by the
48
O’Brien, 429 N.E.2d at 1160.
49
See DPA Ex. B (the Information) ¶¶ 4-6, 11-15.
20
BSA/AML rules. That fact alone undermines Plaintiff‘s suggestion that there is a
meaningful distinction between JPMorgan‘s alleged transgressions related to the Madoff
scheme on the one hand, and its BSA/AML compliance problems on the other.
In addition, the DPA explicitly references and re-affirms JPMorgan‘s obligations
under the 2013 OCC Consent and the Fed Consent. Specifically, it states that ―JPMorgan
shall continue its ongoing effort to implement and maintain an effective BSA/AML
compliance program in accordance with the requirements of the BSA and the directives
and orders of any United States regulator . . . including without limitation the OCC and
Federal Reserve Board, as set forth‖ in the 2013 OCC Consent and the Fed Consent.50
Similarly, the 2014 OCC Consent references the 2013 OCC Consent and the DPA.51 It
also includes a finding that JPMorgan‘s ―internal controls, including filtering processes
and independent testing, with respect to Office of Foreign Asset Control (―OFAC‖)
compliance are inadequate,‖ and that those inadequacies resulted in the Company
―operat[ing] outside of the normal AML monitoring and OFAC screening controls.‖52
The 2013 OCC Consent similarly included a finding that JPMorgan‘s OFAC compliance
systems were inadequate.53 Thus, the relevant settlement and consent order documents
themselves indicate that each individual transaction was part of one series of transactions
relating to the Company‘s resolution of various alleged BSA/AML and OFAC violations
50
DPA ¶ 19.
51
2014 OCC Consent 1-2; see also Compl. ¶¶ 229, 234.
52
2014 OCC Consent 4.
53
2013 OCC Consent 4.
21
during the Relevant Period. In other words, it is not possible to read the OFAC
Settlement, the 2013 OCC Consent, the Fed Consent, the DPA, and the 2014 OCC
Consent and conclude that they do not form a ―single factual grouping‖ and make ―‗a
convenient trial unit.‘‖54
A further ground for concluding that the DPA is part of a series of transactions
along with the other BSA/AML settlements and consent orders is that Plaintiff‘s own
allegations indicate that it is. Plaintiff‘s unitary treatment of the settlements and consent
orders is illustrated, for example, by its repeated assertion that JPMorgan‘s violations
resulted in over $2 billion in damages to the Company.55 This aggregation of the
Company‘s OFAC, OCC, and DPA sanctions and fines into one larger grouping
undermines Plaintiff‘s attempt now to argue that the claims in the Central Laborers‘
Action—with its heavy reliance on the DPA—arose out of an entirely separate series of
transactions than the claims Plaintiff seeks to prosecute here. The fact that Plaintiff
swept all of the alleged wrongdoing into one defined ―Relevant Period‖ similarly reveals
54
UBS Sec. LLC v. Highland Capital Mgmt., L.P. 927 N.Y.S.2d 59, 64 (N.Y. App.
Div. 2011) (quoting Smith v. Russell Sage Coll., 429 N.E.2d 746, 749 (N.Y.
1981)).
55
E.g., PAB 2-3 (―[The Complaint‘s] allegations—buttressed by findings of federal
regulators that the Company‘s violations of U.S. Economic Sanctions were
‗egregious‘ and ‗reckless‘ and that the Company‘s BSA/AML compliance
program was deficient in violation of U.S. law—demonstrate a sustained and
systemic failure of oversight by Defendants, which caused substantial damage to
the Company and its stockholders when the Company‘s regulators imposed fines
and penalties amounting to over $2 billion.‖); Compl. ¶¶ 5, 13.
22
the continuous and integral nature of the alleged wrongdoing that gave rise to the OFAC
Settlement, the 2013 and 2014 OCC Consents, the Fed Consent, and the DPA.
More broadly, throughout the Complaint and in its briefing, Plaintiff recited the
facts in a way that suggests that neither the DPA nor any one of the other settlements and
consent orders readily could be segregated from the others. In discussing JPMorgan‘s
BSA/AML compliance policies and procedures, the Complaint alleges that the Company
addressed the various BSA/AML and U.S. Economic Sanctions laws and regulations as a
unit, especially after 2005 when six existing Company compliance policies were
consolidated into one document.56 When detailing the numerous allegations of
compliance violations during the Relevant Period, the Complaint moves from one to the
next in a continuous narrative with little or no regard to which settlement or settlements
were implicated. Even in its opposition to this motion, Plaintiff seamlessly ties together
the OFAC Settlement, 2013 OCC and Fed Consents, the DPA, and the 2014 OCC
Consent. For example, Plaintiff connected the OFAC Settlement with the succeeding
2013 OCC Consent by stating, ―Even after the OFAC settlement, the core defects with
the Company‘s BSA/AML compliance systems were not corrected.‖57 Then, linking
those two transactions with the 2014 OCC Consent and the DPA, Plaintiff asserted that,
―Incredibly, in the wake of the OFAC penalty and the 2013 Consent Order, the Company
56
Compl. ¶¶ 72-89.
57
PAB 16.
23
continued violating BSA/AML laws and regulations.‖58 The entirety of the Complaint‘s
allegations and Plaintiff‘s assertions in its briefing and argument support the conclusion
that the OFAC Settlement, the 2013 OCC Consent and Fed Consent, the DPA, and the
2014 OCC Consent form one series of transactions. That is, they fit together as a ―factual
grouping,‖ insofar as they are ―‗related in time, space, origin, or motivation‘‖ and
because ―‗their treatment as a unit conforms to the parties‘ expectations or business
understanding or usage.‘‖59
In sum, both the documents relating to JPMorgan‘s settlements and consent orders
during the Relevant Period and Plaintiff‘s own allegations support the conclusion that the
DPA was one aspect of a series of transactions for purposes of preclusion analysis.
Because claims arising out of the DPA were reduced to a final judgment in the Southern
District‘s Central Laborers’ decision, any and all claims arising out of the same series of
transactions are barred by New York‘s transactional approach to res judicata. All of
Plaintiff‘s claims in this action fall within that series of transactions. I conclude,
therefore, that Plaintiff is precluded from re-litigating those claims here.
58
Id. at 18. Statements like these, in addition to all the other circumstances already
discussed, undermine Plaintiff‘s attempt to differentiate this case from the Central
Laborers‘ Action by arguing that the OFAC Settlement was not mentioned in the
complaint in that action. E.g., Arg. Tr. 44. It is not legally relevant that the OFAC
Settlement may have evaded the plaintiff‘s attention in the Central Laborers‘
Action; what matters is whether that transaction is part of one series of
transactions, including the DPA. I find that it is.
59
UBS Sec. LLC, 927 N.Y.S.2d at 64 (quoting Russell Sage Coll., 429 N.E.2d at
749).
24
In arguing for a contrary conclusion, Plaintiff contends that a prior judgment
precludes a subsequent suit under res judicata ―only ‗where the same evidence is needed
to support both claims, and where the facts essential to the second were present in the
first.‘‖60 Plaintiff further asserts that ―the evidence and allegations in support of
Plaintiff‘s claims in this action differ[] from the evidence in Central Laborers’. Here,
Plaintiff is a different stockholder, bringing different claims, relying on facts that were
not even known to the plaintiffs in the prior actions.‖61 According to Plaintiffs, the
Central Laborers‘ complaint, unlike its own, ―focused exclusively on one limited issue—
the Company‘s relationship with Bernard Madoff.‖62 Admittedly, the factual allegations
in the Central Laborers‘ complaint differ substantially from the allegations in the
Complaint here, insofar as the Central Laborers‘ allegations focus almost entirely on
JPMorgan‘s connection to the Madoff Ponzi scheme, while Plaintiff studiously avoids
discussing that situation at any length.63
The problem is that Plaintiff‘s argument rests on an articulation of the law of res
judicata that the New York Court of Appeals has expressly abandoned. This has been
explained in recent cases like UBS Securities LLC v. Highland Capital Management,
60
PAB 29-30 (quoting S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1464 (2d Cir.
1996) (emphasis added by Plaintiff)).
61
Id. at 30 (internal citation omitted).
62
Id. at 22.
63
Madoff is mentioned, however, several times in Plaintiff‘s Complaint. E.g.,
Compl. ¶¶ 143, 230.
25
L.P.64 There, the Appellate Division stated, ―It used to be the rule that, even if the two
actions arose out of an identical course of dealing, the second was not barred by res
judicata if ‗[t]he requisite elements of proof and hence the evidence necessary to sustain
recovery var[ied] materially.‘‖65 As noted by the court in UBS Securities, however, the
New York Court of Appeals ―expressly rejected that method of analysis in O’Brien v City
of Syracuse. There it held that ‗once a claim is brought to a final conclusion, all other
claims arising out of the same transaction or series of transactions are barred, even if
based upon different theories or if seeking a different remedy.‘‖66 The reason is that
when different theories or evidence relate to ―‗harm arising out of the same or related
facts such as would constitute a single ‗factual grouping,‘ the circumstance that the
theories involve materially different elements of proof will not justify presenting the
claim by two different actions.‘‖67
The First Jersey Securities, Inc. case, on which Plaintiff relies in this regard, cites
to a line of cases that stemmed from the New York Court of Appeals‘ 1953 opinion in
Smith v. Kirkpatrick.68 But the O’Brien Court overruled Smith to the extent that case
64
927 N.Y.S.2d 59 (N.Y. App. Div. 2011).
65
Id. at 64 (quoting Smith v. Kirkpatrick, 111 N.E.2d 209 (N.Y. 1953)).
66
Id. (quoting O’Brien v. City of Syracuse, 429 N.E.2d 1158, 1159 (N.Y. 1981)).
67
Id (citation omitted).
68
See First Jersey Sec., Inc., 101 F.3d at 1464; NLRB v. United Techs. Corp., 706
F.2d 1254, 1260 (2d Cir. 1983); Tucker v. Arthur Andersen & Co., 646 F.2d 721,
727 (2d Cir. 1981); McNellis v. First Fed. Sav. & Loan Ass’n of Rochester, 364
F.2d 251, 255-56 (2d Cir. 1966); Herendeen v. Champion Int’l Corp., 525 F.2d
130, 133-34 (2d Cir. 1975). In this regard, I note that First Jersey Securities relies
26
could be read as supporting a test for res judicata different from the transactional analysis
approach articulated in O’Brien.69 Plaintiff‘s argument, therefore, rests on an incorrect
statement of the New York law of res judicata. Even if First Jersey Securities set forth
the correct standard, however, it is materially distinct from this case. There, the court
refused to apply res judicata to the plaintiff‘s claims arising out of a series of fraudulent
transactions that occurred from 1982 to 1985, where the defendant had entered into a
settlement with the SEC regarding other allegedly fraudulent transactions that occurred
between 1975 and 1978. The court therefore concluded that the later complaint was not
based on the same transaction or series of transactions as the earlier settlement.70 As
discussed above, the alleged wrongdoing in this case on which Plaintiff bases its
Complaint is the same wrongdoing on which the Central Laborers‘ Action was premised:
the Company‘s numerous alleged BSA/AML and U.S. Economic Sanctions violations
during the Relevant Period. Thus, even if the factual story Plaintiff told in its Complaint
and the evidence it would need to prove its claims are considered different from those in
the Central Laborers‘ Action, that still would not enable Plaintiff to avoid New York‘s
res judicata doctrine, because the underlying series of transactions is the same.
on NLRB, which cites to Tucker and Herendeen; Tucker itself also cites to
Herendeen, as well as to McNellis. Herendeen and McNellis, however, both rely
on and cite to language in Smith that appears inconsistent with O’Brien.
69
O’Brien, 429 N.E.2d at 1160 n.1.
70
First Jersey Sec., Inc., 101 F.3d at 1464 (―Plainly, the SEC could neither have
included its present claims with respect to transactions occurring in 1982–1985 in
its 1979 administrative charge nor proven those transactions in a hearing that did
not extend past 1980.‖).
27
III. CONCLUSION
For the foregoing reasons, I grant Defendants‘ motion and dismiss the Complaint
in its entirety with prejudice on grounds of res judicata.
IT IS SO ORDERED.
28