Asbestos Workers Local 42 Pension Fund v. Linda B. Bammann

IN THE COURT OF CHAN CERY OF THE STATE OF DELAWARE
ASBESTOS WORKERS LOCAL 42
PENSION FUND, derivatively on behalf
of Nominal Defendant JPMORGAN
CHASE & CO., a Delaware corporation,
Plaintiff,
Var.
LINDA B. BAMMANN, JAMES A.
BELL, CRANDALL C. BOWLES,
STEPHEN B. BURKE, DAVID M.
COTE, JAMES S. CROWN, JAMIE
DIMON, TIMOTHY P. FLYNN,
ELLEN V. FUTTER, LABAN P.
JACKSON, MICHAEL A. NEAL,
DAVID C. NOVAK, LEE R.
RAYMOND, WILLIAM WELDON,
DOUGLAS L. BRAUNSTEIN,
MICHAEL CAVANAGH, INA DREW,
IRVIN GOLDMAN, JOHN HOGAN,
PETER WEILAND, JOHN WILMOT,
and BARRY ZUBROW,
Defendants,
and
JPMORGAN CHASE & C0,,
Nominal Defendant.
unfit
.1:-
C.A. No. 9772—VCG
MEMW
Date Submitted: February 3, 2015
Date Decided: May 21, 2015
Carmella P. Keener and P. Bradford deLeeuw, of ROSENTHAL, MONHAIT &
GODDESS, P.A., Wilmington, Delaware; OF COUNSEL: Stewart L. Cohen,
Robert L. Pratter, Jacob A. Goldberg, and Alessandra C. Phillips, of COHEN,
PLACITELLA & ROTH, P.C., Philadelphia, Pennsylvania; Peter Safirstein and
Elizabeth Metcalf, of MORGAN & MORGAN, PC, New York, New York,
Attorneys for Plaintiff
Gregory P. Williams, Catherine G. Dearlove, and Christopher H. Lyons, of
RICHARDS LAYTON & FINGER P.A., Wilmington, Delaware; OF COUNSEL:
Richard C. Pepperman, II and George R. Painter IV, of SULLIVAN &
CROMWELL LLP, New York, New York; Daryl A. Libow and Christopher M.
Viapiano, of SULLIVAN & CROMWELL LLP, Washington, DC, Attorneys for
Defendants James Dimon, Douglas L. Braunstein, Michael Cavanagh, Ina Drew,
Irvin Goldman, John Hogan, Peter Weiland, John Wilmot, Barry Zubrow and
JPMorgan Chase & Co.
David C. McBride, William D. Johnston, and Kathaleen S. McCormick, of
YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; OF
COUNSEL: Jonathan C. Dickey and Brian M. Lutz, of GIBSON DUNN &
CRUTCHER LLP, New York, New York, Attorneys for Defendants Linda B.
Bammann, 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., Michael
A. Neal, David C. Novak, Lee R. Raymond, and William C. Weldon.
GLASSCOCK, Vice Chancellor
describe the Complaint and the documents it incorporates by reference in their
entirety.19
C. The C10
JPMorgan’s CIO, “formed in 2005 through a spin-off of the Company’s
internal treasury function, is part of the Corporate and Private Equity sector at
JPMorgan and manages the Company’s excess cash deposits.”20 It was touted in
the Company’s annual reports, the Plaintiff notes, “as mitigating structural risks
that arise out of the various business activities” of the Company.21 The Plaintiff
alleges that the CIO “[t]raditionally . . . followed a typical conservative approach
for large banks and invested the Company’s excess deposits in very safe
instruments, including US. treasury bonds, municipal bonds, corporate securities,
high-grade corporate bonds, and high-grade mortgage-backed securities.”22
Because the CIO was supposedly engaging in hedging, that is, “an investment
position that is specifically made, documented and designed to reduce or offset the
risk from a specific investment,” it was subject to regulations of the Office of the
1‘ ‘— _ ' _ ——5"
__—_
19 The Complaint contains 386 paragraphs in 212 pages. I note that in Grimes v. Donald, 673
A.2d 1207, 1215 (Del. 1996), then—Chief Justice Veasey referred to a 43-page complaint as
“prolix.” By the time of Brehm v. Eisner, 746 A.2d 244, 249 (Del. 2000), it was an 88-page,
285-paragraph complaint that the Court considered “prolix.” Where are the snows of yesteryear?
I note, however, that if this is a trend, it is, unfortunately, not limited to practitioners before the
Court of Chancery. See Ironworkers Dist. Council of Philadelphia & Vicinity Ret. & Pension
Plan v. Andreotti, 2015 WL 2270673, at *2 n2 (Del. Ch. May 8, 2015).
20 Compl. 11 140.
21 Id
22 Id. 11141.
Comptroller of the Currency (“OCC”), which require, in essence, defined strategies
that describe the investment instruments and acceptable levels of risk.23
In 2005, Dimon appointed Drew to serve as the Company’s Chief
Investment Officer “as part of his plan to transform the CIO from a risk-mitigating
operation to a profit center,” by which they, together with other senior executives,
“aggressively transformed the CIO into a proprietary trading desk.”24 In May
2006, the CIO authorized trading in credit derivative indices and credit default
)9 “
swaps not limited to a single corporation. This “New Business Initiative was
presented as a risk reduction effort to protect JPMorgan against cyclical exposure
to credit,” and was assigned an initial Value—at-Risk (“VaR”) of $5 million.25 This
credit-trading program came to be known as the Synthetic Credit Portfolio. The
Plaintiff notes that trading in the CIO was more profitable than in other divisions
because the CIO’s cost of investment capital was lower than that of the investment
bank division (the “Investment Bank”) by virtue of using excess bank deposits and
because CIO traders retained a smaller portion of the trading profits than
Investment Bank traders.26
23 Idaho 1111 5—6.
24 Id ‘fl 142. Proprietary trading, the Plaintiff notes, involves the Company “trading to generate
profits using its own account and taking on greater risk in the process. This is distinct from a
business unit that manages risk through hedge trades, which is what JPMorgan and the Board
represented CIO’s purpose was to its stockholders.” Id.
25 Id. 1] 144. Value-at-Risk is a measure of a risk of loss.
26 See id. it 156.
10
E
I;
Beginning in November 2007, “internal audits recognized there were
problems with the CIO’s methods of accounting and price testing of credit
derivatives.”27
In conducting an audit that was characterized as a “First Time
Review of New Business, Product or Service,” the Company’s internal auditors
described the CIO’s activities as “proprietary position strategies executed on credit
and asset backed indices”28
and did not indicate that the credit trading activity was
being conducted to lower the Company’s risk.29 The internal audit group found the
CIO’s control environment satisfactory but noted “calculation errors” in the CIO
Valuation Control Group’s testing of prices of credit derivatives.30
The Plaintiff alleges, “After changing the focus of the SCP from asset-
liability management to generating revenue, JPMorgan failed to document this
change in the SCP in accordance with its own internal policies and failed to
9931
disclose the portfolio’s existence to regulators. In 2008, for example, Dimon,
Drew, and “certain of the [other] Defendants” “violated OCC notification
requirements by failing to inform the OCC that the SCP had added credit index
tranche positions to the SCP even though this addition represented a ‘substantial
13’32
change in business strategy. Specifically, the SCP was not mentioned in
-9..__._._._._—_.——-
a-U—H
27161.1[146
2" Id.
29 Id. 11147.
301d
3‘ Id. 11150.
32 Id. 11151.
11
written communication to regulators until January 2012, five years after its
inception, and “the first time the OCC became aware of the SCP’s true size and
risk exposure was after the portfolio attracted media attention in April 2012.”33
D. Relevant Board and Committee Activity in 2009—20] 0
The Plaintiff alleges that “[b]eginning in 2009, the Board repeatedly knew of
red flags and warnings regarding the substantially risky nature of the CIO’s
business, and the dramatically rising size and profitability of the CIO’s business.”34
Specifically, for example, the Audit Committee met on March 17, 2009, at which
time Drew gave a presentation (the “March 2009 Audit Presentation”) which
included notification that the “[i]ncrease in size, complexity and range of product
investments, as well as severe market conditions, have led to increased demands on
CIO’s risk management and control environment;” the portfolio had grown by
$132 billion since the last time the Audit Committee reviewed it.35 In the March
2009 Audit Presentation, the Audit Committee was informed that “the operating
model is clearly more complicated and more prone to error than in the past,” and
that “FASB and other accounting rules continue to be more restrictive with
enhanced documentation required and stricter interpretation of rules by
-. ___ 1;-
33 Id. fl 152. As the Plaintiff notes, “The OCC later determined in 2012 that the Company had
failed to notify the OCC that the SCP had added credit derivatives that were moved from what
was then called the ‘Proprietary Positions Book’ in the Investment Bank when that trading book
closed down.” 1d. 1] 153.
34 Id. 11161.
35 Idaho 11 163.
12
auditors/regulators.”36 Further, the March 2009 Audit Presentation showed that the
CIO would be integrating a portion of the Investment Bank’s “Proprietary
Positions Book” (“PPB”) technology platform into its existing infrastructure. The
PPB technology “had the ability to handle complex derivative trades to address the
fact that [the CIO’s] prior infrastructure could not handle the new activities the
CIO was engaging in.”37 The need for the new technology, the Plaintiff asserts,
“demonstrates that the Audit Committee was aware of the metamorphosis of the
CIO from a conservative risk—averse protector of capital, into an aggressive
proprietary trading unit, despite its outward [appearance] as a conservative risk-
averse business unit.”38
The Plaintiff alleges the Audit Committee made a presentation to the rest of
the Board that same day. The minutes of both the Audit Committee meeting and
the Board meeting “fail to reflect any additional actions taken by the Director
Defendants or any discussion into the sources of this complexity and whether the
risk control framework that was in place was adequate to support the increased
demands the trading activities put upon the CIO.”39 Also in March 2009,
[t]he revelation that the CIO earned over 86% more in 2009 than it
had budgeted for constituted additional red flags to the Audit
Committee and the Board to ensure that the risk management and
_ . __ : ._. _ __-:
36 Id. 11166.
37 Id. 11169.
13
g
i
I
'5
g
procedures designed and implemented for the CIO were still
consistent with that business unit’s corporate strategy, in the face of
massive profits from within a conservative and risk-averse business
unit.40
In the absence of documents in response to the Plaintiffs § 220 Demand for the
months of April through August 2009, the Plaintiff infers that neither the Board
nor its committees addressed the CIO’s practices or oversight thereof.41
On September 15, 2009, the Board met and was given a report by the Risk
Policy Committee, as well as a presentation by Drew in which she discussed the
CIO’s role in managing interest rate risk42 and mortgage exposure.43 The Plaintiff
infers, again in the absence of documents produced in response to its § 220
Demand, that neither the Board nor its committees looked into the CIO’s activities,
including the management and oversight thereof, between May and December
2009, as well as January through June 2010.
The Plaintiff also alleges that “[b]y the end of 2009, SCP revenues had
increased fivefold over the prior year, producing over $1 billion in revenue,” a
;-=———=__ :— I"
40 Id. 11174.
4‘ See id. 1{ 173.
42 See Aff. of Christopher M. Viapiano Ex. L at JPMC-CIODEMAND-3366 (“Ms. Drew
discussed Interest Rate Exposure. . . . Ms. Drew described the key measures for the current
interest rate position, discussed risks to the current position and discussed factors under
consideration with respect to exiting our positions in anticipation of increasing interest rates, a
matter which must be executed over time and for which specific steps are being planned”), cited
in Compl. fl 176.
43 See Aff. of Christopher M. Viapiano Ex. L at JPMC-CIODEMAND-3369 (noting, under the
heading “Report of Risk Policy Committee,” that “Ms. Drew reported on the interest rate risk
management process, which was also discussed with the full Board, and also discussed mortgage
exposure under the management of the Chief Investment Office”), cited in Compl. fil 176.
14
“stark increase over the $170 million in revenue for the SCP in 2008.”44 The
Plaintiff contends that “inflated revenues of over $1 billion are a red flag, and
incongruous with a conservative hedge strategy,” in light of the Company’s overall
performance,“5
In July 2010, the Audit Committee met over two days. The meeting minutes
reflect:
Ms. Drew and Messrs. Bonocore and Weiland joined the meeting and
provided an update on the Chief Investment Office (CIO) operating
risk and control environment. Over the past three years, the business
platform has significantly increased in size, complexity and range of
product investments. This has led to increased demands on risk
management, controls, technology and infrastructure. Management
stated that the controls have kept pace with the increased complexity
of the business. Other topics discussed included the integration of the
Treasury support functions into the existing CIO platform, progress on
the multi—year technology project and enhancements to the valuation
process. Following the discussion, Ms. Drew and Messrs. Bonocore
and Weiland left the meeting.46
The materials presented to the Audit Committee also showed that the CIO’s actual
pre-tax revenues were $2.345 billion for 2008 and $9.312 billion for 2009, along
with a C10 pre—tax forecast of $6.5 billion for 2010. Because no documents were
produced (1) “evidencing that the Audit Committee made any inquiries into how
the CIO’s controls were keeping pace ‘with the increased complexity of the
business,’” nor (2) showing “that, in 2009 and/or 2010, the Audit Committee
44 Compl.1] 175.
45
“Hymn
15
limited or constrained speculative trading in the SCP, nor that it properly disclosed
such trading or requested any proof of compliance with accounting, regulatory and
documentation requirements relating to SCP trading in the CIO,” or (3) indicating
“how the CIO was testing its controls or if the Audit Committee made any
assessment of how the CIO’s business fit within JPMorgan’s risk appetite as a
whole,” the Plaintiff requests a negative inference “that the Audit Committee,
along with the other 2009 Director Defendants, turned a blind eye to such wrongful
practices for years prior to the losses and damages complained of herein” and
failed to ensure proper risk management and oversight procedures in the face of the
CIO’s strategy.47
In September and December 2010 presentations to the Risk Policy
Committee, the SCP was shown as having “one of the shortest investment horizons
in the CIO and display[ing] short-term speculative tactics,” which “activities were
clearly not conservative and were not a legitimate hedge as defined by accounting
and regulatory authorities.”48 The presentations also showed “[s]ubstantial
increases in profits” which, the Plaintiff contends, “constitute a red flag where, as
here, the CIO was being publicly portrayed as a risk management tool, not a profit-
making trading operation.”49
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16
The September 2010 presentation to the Risk Policy Committee indicated
that the CIO’s “key mandate” was to “[o]ptimize and protect the Firm’s balance
sheet from potential losses, and create and preserve economic value over the
longer-term.”50 In the absence of documents produced, the Plaintiff requests “a
negative inference that the [Risk Policy Committee] asked no questions and took
no risk oversight role with regards to the information” in that presentation.“
The Risk Policy Committee met on December 14, 2010, at which meeting it
was “responsible for approving the firm—wide Risk Appetite Policy on behalf of the
Board of Directors.”52 In a presentation from the CIO, the Risk Policy Committee
was informed that “[t]actical credit strategies have contributed approximately
$2.8bn in economic value from inception with an average annualized [return on
equity] of 100%.”53 This, the Plaintiff alleges, should have alerted the committee
that the CIO was not mitigating risk, but rather, was working as a profit center.
The Risk Policy Committee reported to the Board and included a summary of its
agenda related to the aforementioned December meeting.
50 Id 1] 192 (emphasis omitted).
51 Idaho 11 193.
52 Id. Tl 195. A “Risk Appetite” presentation indicated, among other things, “several risk factors
for which the Firm has little to no tolerance level,” including “[a]ctions that damage the Firm’s
[r]eputation;” “[l]ack of compliance with regulatory mandates;” “[e]ntering into products and
services that are not well understood, are excessively complex, or are misleading to customers;”
and “[w]eak control environment.” Id. 11 196.
53 Id. 1[198.
17
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g
?
Also in December 2010, the OCC sent a letter to Drew including a “Matters
Requiring Attention” (“MRA”) report that found that “management needed to
‘document investment policies and portfolio decisions,”’ and that “the ‘risk
management framework’ for the investment portfolios, including the SCP, lacked a
‘documented methodology,’ ‘clear records of decisions,’ and other features to
ensure that the CIO had appropriate controls in place and was exercising
appropriate risk management measures.”54 From this, the Plaintiff posits that “the
Complaint draws the reasonable inference that the Board failed ‘to ensure that a
risk management and control environment structure commensurate to the CIO’s
new proprietary trading strategy existed.”55 It is not clear whether the MRA was
presented to the Board, the Audit Committee, or the Risk Policy Committee.56
E. Relevant Board and Committee Activity in 2011—2012
As discussed below, one of the bases for the present Motion to Dismiss is
that the application of collateral estoppel precludes relitigation of the issue of
demand futility. In response, also discussed below, the Plaintiff pointed to its
supplemental document production, which allowed it to allege facts dating back to
2009 and 2010, as making the Complaint (in the Plaintiff’s view) materially
different and thus precluding application of collateral estoppel. In the interest of
5“ Id. 11200.?
55 Pl.’s Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Derivative Compl. for Failure to
Adequately Allege Demand Futility at 8 (quoting Compl. 1] 12).
56 See Compl. 11 204.
18
The CW. Morgan is the last surviving ship of the American whaling fleet.l
In 1820, another ship of that 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.2 In 2012, another Morgan—
JPMorgan Chase & Co. (“JPMorgan,” or the “Company”)—was heavily damaged
by another whale—the so—called London whale. JPMorgan did not founder, but
suffered losses in the billions of dollars.
The Plaintiff here is a stockholder of JPMorgan, seeking derivatively to hold
those at the helm accountable for the damage caused by the London whale. It
seeks to sue the directors (and certain officers) of JPMorgan under a theory based
on the rationale of this Court’s decision In re Caremark International Inc.
Derivative Litigation.
Under our model of corporate law, the directors run the corporation as
fiduciaries for its owners, the stockholders. Assets of the corporation, including
choses in action, are disposed of within the discretion of the board.3 A stockholder
who believes that the corporation should pursue legal proceedings, therefore, must
request that the board take that action on behalf of the corporation. Only in
1 See Charles W. Morgan, Mystic Seaport, http://www.mysticseaport.org/visit/explore/morgan/
(last visited May 20, 2015).
2 See Owen Chase, Narrative of the Most Extraordinary and Distressing Shipwreck of the Whale-
Ship Essex (1821).
3 The reader is referred to the interesting historical discussion of derivative actions in In re
Activision Blizzard, Inc. S’holder Litig, CA. No. 8885—VCL, at 29—36 (Del. Ch. May 20, 2015).
1
efficiency, my summary of the facts alleged outside that time period is somewhat
abbreviated here.
Throughout the spring of 2011, the Risk Policy Committee and Audit
Committee met at various times. Reports showed that the CIO’s Value-at—Risk had
increased by $11 million in the first quarter of 2011, that the firm-wide “Aggregate
Stress” had exceeded its $8.8 billion limit by $400 million, “driven by increased
stress losses from position changes within the [Investment Bank] and CIO,”57 and
that the CIO and Risk Management had, as the Plaintiff terms it, “high-severity
audit issues.”58 In a May 2011 Board meeting, the Board was informed that the
Corporate Department, which includes the CIO and Treasury, had “[h]igher
expenses and lower [price-to-earnings ratio], partially offset by higher trading
gains,” which the Plaintiff alleges was another red flag since “[t]he CIO was
designed to offset risk, not make a profit, for the Company.”59
A July 2011 Audit Committee meeting showed that while firm-wide VaR
had decreased, the CIO’s VaR “remained materially unchanged” from January to
February 2011, and that, in February, the firm-wide Aggregate Stress was only
$100 million below its $8.8 billion limit.60 In a different July 2011 meeting, Risk
Management provided the Risk Policy Committee with more specific information
57 Id. 11209.
58 Idaho 11 210.
591d. 11211.
“M. 11212.
19
about the VaR and stress limits through June of 2011, rather than stopping at
February as the Audit Committee’s data did. In the Board meeting that month,
Jackson provided “an update on the Chief Investment Office operating risk and
control environment, stating that overall control environment and business
- 61
processes remain strong.” ;
In September, the Risk Policy Committee was informed that firm-wide VaR
exceeded its $125 million limit seven days in the month of August, driven
primarily by market volatility. They were also informed that the CIO had breached I
its aggregate stress limit of $800 million by $90 million, “driven mainly by
decreasing positive impact of the synthetic credit tranche book.”62 Similar
notifications that firm-wide VaR had exceeded its limits were present in reports
provided to the Risk Policy Committee in October and December 2011.
The Audit Committee met in November and the minutes from that meeting
are the first to reflect any discussion of credit default swaps; though no details of l
the discussion are provided in the minutes, the Plaintiff notes the significance of
any mention of credit default swaps, as these are the “risky type of trades engaged
in by the CIO which resulted in its subject losses.”63
611d.1[ 214,5;
Marya
63 Idaho 11 218-..._
20
A report provided to the Risk Policy Committee in December 2011
indicated that the firm had “temporarily increased” its VaR limit to $185 million
and indicated in a footnote that the firm modified its stress limits as well.64
The size of the SCP increased tenfold in 2011 alone due to excess deposits
that poured into JPMorgan in the wake of the financial crisis; because it was
perceived as a sound financial institution, “JPMorgan’s deposits grew by $380
billion, or more than half, in four years.”65 Given such a dramatic increase in the
size of the portfolio, the Plaintiff opines that “it was imperative that the CIO adhere
to the strong risk management practices that J PMorgan management and the Board
publicly represented the Company followed” and it was “imperative that the Board
closely monitor and mitigate the Company’s risk exposure due to all of the CIO’s
activities. Subsequent events reflect that this never took place, to the detriment of
the Company and its shareholders.”66
In January 2012, PricewaterhouseCoopers sent the Audit Committee its
2012 audit plan, which referenced the Volcker Rule of the Dodd Frank Act. The
originally proposed Volcker Rule would have banned all proprietary trading—that
is, using deposits to trade on a bank’s own account—by commercial banks without
64 Idaho 1111 220—21.;
65 Idaho 11 157.
66 Idaho 11 158.
21
the express consent of depositors; this would have rendered the described CIO
trading practices unlawful, according to the Plaintiff.67
The Risk Policy Committee also met in January and was informed that firm—
wide average VaR had increased over the previous quarter, which increase was
“driven by increased VaR in [the Investment Bank], CIO and [Retail Financial
Services].”68 The Risk Policy Committee reported to the Board as well, indicating
9? ‘6
that the challenges for the CIO included “[r]egulatory uncertainty, [i]nvestment
challenges,” and “Volcker.”69
In a February report by PricewaterhouseCoopers to the Audit Committee,
the auditor stated:
In communicating our 2011 audit plan to the Audit Committee in
January 2011, we shared our initial assessment of significant audit
risks . . . [that] requir[e] special consideration because of the nature of
necessary judgment (higher inherent risk), the likelihood of error
occurring, and likely magnitude of potential misstatements:
0 Valuation of complex and/or illiquid financial instruments
within the [REDACTED] Chief Investment Officer [sic]
(CIO)/Treasury (TSY), including the methodologies and tools
applied[.]
[REDACTED]
67 Id fl 225. The Complaint notes that according to a report by the New York Times, JPMorgan
made strong arguments that resulted in a less restrictive version of the Rule. See id. (citing
Edward Wyatt, JPMorgan Sought Loophole on Risky Trading, NY. Times, May 12, 2012,
available at http://www.nytimes.com/2012/05/12/business/jpmorgan-chase-fought-rule-on-risky-
tradinghtml).
6* Id. 11 231.
69 1d. 'n 230.
22
0 Application of fair hedge accounting within CIO/TSY.70
That report also noted that the CIO was among “[s]ignificant accounting and
financial reporting matters [that] were discussed with the Audit Committee during
the [preceding] year.”71
The Risk Policy Committee met again on March 20, 2012, at which time the
deputy to the CRO reported on increased VaR limits in late 2011, including that of
the C10. The Risk Policy Committee also provided a report to the Board, in which
it relayed “a VaR temporary one—off limit implemented in late 2011, in response to
increased [Mortgage Servicing Rights] VaR;” that the Company’s aggregate stress
limit was raised from $8.8 billion to $9.75 billion in November 2011; that the
Company’s VaR was increased from $125 million to $150 million due to a
reduction in diversification benefit; and that the CIO VaR was also temporarily
raised.72
As discussed below, shortly after this meeting, Drew temporarily stopped
CIO trading on March 23, 2012, and the media began reporting Iksil’s trades in
early April.
70 Id. 1] 234 (alterations in original).
7‘ Id. 11 236.
72 Idaho 11 238.
23
F. Goings-0n in the CIO—“A Lot ofTempest in a Pot 0 ’ Tea! “73
At all relevant times, the Company claimed that the SCP was a “macro-level
hedge,” which would not require a “reasonable correlation” with the assets being
hedged.74 But, the Plaintiff asserts, “all hedges must offset a specified risk
associated with a specified position,” and without such specificity, a hedge cannot
be tested for effectiveness—it would instead “function as an investment designed
3375
to take advantage of a negative credit environment. In the absence of
documentation as to hedging methodologies, the Plaintiff points out, it seems that
the SCP was not functioning as a hedge at all.76 As the Plaintiff contends, “To
date, no CIO documentation has surfaced to indicate that SCP’s credit derivatives
were subjected to JPMorgan’s risk management objectives and strategy analysis.”77
The Plaintiff notes that the lack of documentation “stands in contrast to accepted
JPMorgan procedure with respect to other CIO hedges.”78
The Complaint notes that, in an attempt to lower risk-weighted assets in the
CIO at the end of 2011, and thereby reduce the Company’s capital requirements,
73 “The whole thing don’t sound very good to me.” Richard Rogers & Oscar Hammerstein II, All
Er Nuthin ’, on Oklahoma! (Decca Records, 1943).
74 Idaho 11 248. The Plaintiff also notes that an internal presentation by the CIO intended to prepare
JPMorgan executives for an earnings call in April 2012 showed that, for example, if there was a
new financial crisis, the SCP would also lose money, indicating it was not functioning to offset
macro-level losses. See id. 1] 260.
75 1d.
76 See id. 11 249.
77 Idaho 11 254.
78 Idaho 11 257.
24
the CIO adopted a trading strategy that resulted in greater complexity in the fall of
2011.79 The Plaintiff also alleges that the compensation for the CIO provided
incentives that were no different from those in the Investment Bank—that is, the
compensation “rewarded CIO traders for financial gain and risk-taking more than
for effective risk management.”80
The Plaintiff also alleges that the CIO lacked adequate risk personnel and
that internal reporting lines disabled risk personnel from “stand[ing] up to the CIO
leadership to challenge investment strategies within the CIO.”81 A new CRO of
the CIO, Goldman, was appointed: in January 2012 on advice of Drew and Zubrow;
Goldman is Zubrow’s brother-in—law and had worked for Drew previously, but not
in a risk management capacity.82 That same month, “when the CIO began to
breach its own risk limits and those of the Company due to the SCP losses,”
neither Goldman nor Weiland, the Chief Market Risk Officer for the CIO, enforced
the risk limits.83
_—_ —_-_——=_—___n_=____fl
79 See id ‘fi 239. The Complaint also noted that in late 2011, Iksil placed a large bet that cost up
to $1 billion and required at least two companies to declare bankruptcy or go into default by
December 20, 2011. When the media and other traders became aware of his bet, hedge fund
investors began betting against Iksil’s positions. “Luckily, on November 29, 2011, American
Airlines declared bankruptcy and triggered a massive payout to holders of the short side of the
position—which included the CIO, to the tune of $400 million in gains to JPMorgan.” Id. 11241.
But for this amount, the Plaintiff alleges, the SCP would have lost money in 2011. See id. 111]
240—44.
8° Id. 11 245. See also id. 1111 246—47.
8‘ See id. 11 262.
32 See id. 11 263.
83 Id. 11264.
25
In January, the SCP sustained losses breaching multiple VaR risk limits for
the CIO and for the Company as a whole, but rather than undertake remedial
action, the Company “largely ignored the breaches or raised the relevant risk limit,
which did not resolve the underlying issue.”84
In late January, a new VaR risk model was introduced for the CIO, under
which the SCP’s risk level “immediately lowered . . . by 50%, which both ended
the breach and enabled the CIO to continue to engage in derivatives trading
without appropriate monitoring.”85 The SCP had sustained losses on 17 of 21
business days in January, which continued into February (losses on 15 of 21
business days) and March (losses on 16 of 22 business days).86
Also beginning in late January, CIO traders began to avoid using accepted
methodology for marking similar positions and began mismarking their books to
conceal losses.87 Because the Investment Bank was a counterparty to some of the
CIO’s trades, and used a different marking methodology, the CIO’s mismarking
became apparent even to outside counterparties.88
According to the Senate Report, when the counterparties pushed back, the
SCP traders engaged in trading designed to “defend” their valuation;89 upon
84 Id. 11269; see also id. 11 264.
85 Id. 11271.
86 Idaho 11 272.
87 See id. fl 280 (describing what the Plaintiff characterizes as mismarking).
38 See id. 1111 287-88.
89 Senate Report at 86.
26
learning of this defensive approach, on March 23, 2012, Drew ordered CIO traders
to stop SCP trading, “which did nothing to stop the mismarking or the incurring of
losses on the SCP portfolio.”90
On March 30, the CIO reported a daily loss of $319 million, six times larger
than any prior day’s reported loss, but even this was understated due to
mismarking.”
On April 6, 2012, the media reported that Iksil had, in the Plaintiff’s words,
“roiled the markets with positions so large it was distorting prices.”92 Dimon and
Braunstein asked Drew for a “full diagnostic” of the SCP that day.93 On April 10,
2012, the CIO reported an estimated daily loss of $6 million, but ninety minutes
later, the figure had jumped to $400 million. That same day, the SCP internally
reported that its year-to-date losses were $1.2 billion. At the end of that week,
Dimon had an earnings call at which he characterized the media reports regarding
the so—called London whale trades as a “tempest in a teapot.”94
In the coming weeks, the Company “continued its positive spin on the CIO,”
even to regulators.95 By May 4, the Company was reporting a loss of $1.6 billion
to its OCC examiner-in-charge. On May 10, the Company filed its Form 10—Q
9° Comp]. 1] 285,,
9‘ See 121.11 286.
92 Id. 1[ 289.
93 Id
94 1d. 11 293.
95 See id. 11 296.
27
disclosing over $800 million in trading losses, with the potential for an additional
billion dollars in losses, from a credit derivative position in the CIO. That same
day, Dimon called the CIO loss, which he acknowledged to be approximately $2
billion with the potential for an increase by an additional $1 billion, “egregious.”96
economic hedge than we thought.”97
He indicated that the SCP was “riskier, more volatile and less effective as an E
The consequences from this loss continued to mount and included a
downgrading in the Company’s short- and long—term debt by Fitch Ratings, I
decreasing stock prices, abandoning a share repurchase program initiated two
months prior, and, eventually, the dismantling of the SCP. Ultimately, on October
15, 2012, the Company disclosed that the SCP losses had exceeded $6.25 billion.
In a Form 10-Q filed November 8, 2012, the Company acknowledged deficiencies
in the CIO’s Value Control Group price verifications, among other things.98
On May 11, 2012, the same day that the Company internally reported a daily
loss of $570 million for the SCP, the SEC, Federal Trade Commission, and Federal
Reserve Bank of New York began investigations into the CIO’s losses. The
|.
Department of Justice and FBI began criminal investigations on May 15, 2012.
|
—— _=._ ——'——-_—lfl=!_
96 Idaho 11 300.
97
98 See id. 11 313,,
28
circumstances where the board is not in a position to exercise its independent
business judgment with respect to the litigation is demand excused and the
stockholder permitted to sue derivatively on behalf of the corporation. The
requirements for demonstrating that demand is excused are provided by Chancery
Court Rule 23.1. The Plaintiff contends that it has satisfied this rule.
This identical 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
4
heard, and rejected, by two New York Courts. The Plaintiff here is collaterally
stopped from relitigating the issue, and the Defendants’ Motion to Dismiss is
granted on that ground.
1. BACKGROUND FACTS5
The basic factual background to this action has been widely publicized. The
Synthetic Credit Portfolio (“SCP”), a portfolio managed by traders in the Chief
Investment Office (“CIO”) of JPMorgan Chase & Co. (“JPMorgan” or the
“Company”) lost approximately $6.3 billion in 2012 as a result of complex, high-
4 See In re JPMorgan Chase & C0. Derivative Litig, 2014 WL 1297824 (S.D.N.Y. Mar. 31,
2014), reconsideration denied, 2014 WL 3778181 (S.D.N.Y. July 30, 2014); Wandel v. Dimon,
No. 651830/12 (N.Y. Sup. Ct. Feb. 3, 2014) (Dkt. N0. 79). In Siege] v. Bell, Index No.
652151/12 (N .Y. Sup. Ct.), the court also considered allegations related to the Synthetic Credit
Portfolio losses, but the Defendants posit that I need not consider its preclusive effect given the
judgments in In re JPMorgan and Wandel.
5 Unless otherwise indicated, all facts are taken from the Plaintiff’s Verified Derivative
Complaint.
2
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In January 2013, the Company entered into a consent order with the Board
of Governors of the Federal Reserve and the Office of the Comptroller of the
Currency (the “Consent Order”). The Consent Order stated that the OCC had
identified “certain deficiencies, unsafe or unsound practices and violations of law
or regulation.”99 On March 14, 2013, the Senate Report was published, with
hearings beginning the next day. On September 18, 2013, the Company agreed to
pay a total of $920 million in fines and penalties to the SEC and to UK regulators
and was required to admit wrongdoing in connection with the SEC settlement.100
On October 17, 2013, the Company entered into a settlement with the Commodity
Futures Trading Commission, in which the Company neither admits nor denies
liability, but agreed to pay $100 million to the CFTC and undertake certain
remedial measures.
“To date, the SCP book has lost more than three times the revenues it
produced in its first five years combined.”101
G. The Federal Derivative Action
In 2012, a consolidated derivative action was commenced before Judge
George B. Daniels of the United States District Court for the Southern District of
L; __:='———:_—&':——:i—E__H—=-——__n_—a_
99 Idaho 11 323.
‘00 See id. 11 328.
‘0‘ Id. 11 314.
29
New York, which was captioned as In re JPMorgan Chase & C0. Derivative
Litigation)” In In re JPMorgan, as characterized by the Defendants,
[The] [p]laintiff alleged that “CIO has actually been operating as a
high-risk proprietary trading desk since at least 2006 when it started
trading in synthetic credit derivatives.” By 2011, plaintiff contended,
“CIO had become massively risky and out of control . . . and the fault
lay squarely with JPMorgan’s Board.” Plaintiff asserted that
JPMorgan’s directors (i) “approv[ed] and/or condon[ed] the CIO’s
change in purpose from Company—wide risk mitigation to a highly
risky proprietary trading desk,” (ii) “chose not to implement new risk
management efforts related to these new risks,” (iii) “fail[ed] to
respond to numerous obvious indications that the SCP was becoming
drastically riskier,” and (iv) “approv[ed] materially false and
misleading statements and/or omissions that failed to informed
shareholders” of the supposed change in CIO’s purpose.103
In other words, the same allegations at issue here.
The court granted a motion to dismiss for failure to comply with Federal
Rule 23.1, which is “either identical to or consistent with”]04 Chancery Court Rule
23.1, for failure to allege demand futility.105
denied, which denial is under consideration on appeal.
9;? —"'
102 The Defendants note that Judge Daniels presides (or presided) over three other shareholder
actions arising out of the ClO’s 2012 losses: a federal securities law action, an ERISA action,
and another derivative action in which the plaintiff made demand, which was refused. The
ERISA action was dismissed for failure to state a claim and the wrongful refusal derivative
action was dismissed for failure to adequately plead wrongful refusal. See Opening Br. in Supp.
of Mot. to Dismiss the Verified Derivative Compl. for Failure to Adequater Allege Demand
Futility at 10 n.4.
103 Id. at 10—11 (internal citations to the complaint in that case omitted) (alterations in original).
'04 Levner v. Saud, 903 F. Supp. 452, 456 n.4 (S.D.N.Y. 1994) (citing Allison v. Gen. Motors
Corp, 604 F. Supp. 1106, 1116 (D. Del. 1985)).
“’5 In re JPMorgan Chase & Co. Derivative Litig, 2014 WL 1297824 (S.D.N.Y. Mar. 31, 2014).
30
A motion for reconsideration was
H. The New York State Court Actions
Also in 2012, a consolidated derivative action was commenced before
Justice Jeffrey K. Oing of the New York Supreme Court, Commercial Division,
captioned as Wandel v. Dimon. In that case, as characterized by the Defendants,
[P]laintiffs argued that CIO’s 2012 losses were “the direct
consequence of Defendants’ failures to properly implement
appropriate internal controls, oversight and risk management.”
According to the complaint, the Board “ignored numerous . . . red
flags,” including letters from a shareholder advocacy group,
“warnings from regulators” and “risk level breaches.” Plaintiffs
further alleged that defendants “systematically concealed” from
JPMorgan’s shareholders and regulators the transformation of C10
from an office charged with “reduc[ing] risk for the Firm, into a
poorly supervised proprietary trading operation.”106
Again, the same allegations raised here.
On January 15, 2014, Justice Oing dismissed Wandel, without prejudice to
the plaintiff to make demand on the Board and proceed with a wrongful refusal
case should the Board reject that demand.107 He held that the plaintiffs’ allegations
did not raise a reasonable doubt as to director independence based on their
compensation, and that the plaintiff failed to adequately allege that the directors
were not disinterested because of a substantial likelihood of personal liability on
the claims asserted. He concluded,
—-—— _.——=—n———u—flv-.
106 Opening Br. in Supp. of Mot. to Dismiss the Verified Derivative Compl. for Failure to
Adequately Allege Demand Futility at 12 (internal citations to the complaint in that matter
omitted) (second alteration in original).
‘07 Wandel v. Dimon, Index No. 651830/12 (N.Y. Sup. Ct. Feb. 3, 2014) (Dkt. No. 79) (Aff. of
Christopher M. Viapiano Ex. A).
3 l
I don’t find that there is a reasonable belief for me to arrive at the
conclusion that . . . the majority of the board members here were
disinterested [sic] and could not exercise their independent business
judgment decision with respect to a demand, such that the demand
would be rendered futile.‘08
Wandel v. Dimon and In re JPMorgan Chase & Co. Derivative Litigation,
together, are referred to as the “New York Actions.”109
1. T he Board Review Committee
The Defendants also note that, in response to stockholder demand letters
asking the Board to investigate CIO losses and commence litigation against those
responsible, the Board created a “Review Committee” of three outside directors.110
The Review Committee retained counsel and conducted an eight—month review,
culminating in a report which “concluded that the Board and the Risk Policy
Committee discharged their duties with respect to the oversight of the Firm and the
CIO,”111 but recommended that certain “practices and policies . . . could be
enhanced to strengthen the Firm’s overall risk management function and the
oversight of that fi,1nction.”“2 The Complaint alleges that the Review Committee
members were not independent and that its report is “self-serving and obfuscate[s]
-¢—_———
‘08 Id. at 5728—13.
109 The Defendants also note that, in another case, Siege] v. Bell, Index No. 652151/ 12, the New
York Supreme Court held that demand on JPMorgan’s Board was not futile in connection with
allegations related to the CIO’s losses in 2012. Because that case preceded Wandel, the
Defendants note that I need not consider the preclusive effect of Siege]. See Opening Br. in
Supp. of Mot. to Dismiss the Verified Derivative Compl. for Failure to Adequately Allege
Demand Futility at 15 n.9.
“0 See Aff. of Christopher M. Viapiano 111] 4—5.
‘“ Id. Ex. Eat2.
112 1d.
32
the sequence of events, [permitting] the Defendants to refuse to hold any high—level
person accountable for any event that led up to the CIO losses.”I 13
II. STANDARD OF REVIEW
Where board action is challenged derivatively, Rule 23.1 requires plaintiffs
to plead with particularity facts that raise a reasonable doubt that the directors are
disinterested and independent or that the challenged transaction was otherwise the
product of a valid exercise of business judgment.114 Where board inaction is
challenged, as in the case of a claim relating to the board’s oversight of the
company, a plaintiff must plead with particularity facts that raise a reasonable
doubt that, as of the time its complaint is filed, the board could have exercised
independent and disinterested business judgment in responding to a demand.115
The Defendants assert the preclusive effect of prior decisions of New York
courts. Under New York law, “[t]he doctrine of collateral estoppel precludes a
party from relitigating an issue which has been previously decided against him in a
proceeding in which he had a fair opportunity to fully litigate the point.””6 Res
judicata operates so that, “as to the parties in a litigation and those in privity with
them, a judgment on the merits by a court of competent jurisdiction is conclusive
“3 Compl. 1] 330. The Company also formed a Management Task Force to investigate. It
produced a 132-page report, which was reviewed and overseen by the Review Committee. The
Plaintiff alleges that the Task Force’s report is also flawed. See id.
“4 Brehm v. Eisner, 746 A.2d 244, 253 (Del. 2000).
“5 Rales v. Blasbcmd, 634 A.2d 927, 934 (Del. 1993).
“6 Kaufman v. Eli Lilly & Ca, 482 N.E.2d 63, 67 (NY. 1985) (internal quotation marks
omitted).
3 3
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of the issues of fact and questions of law necessarily decided therein in any
- 117
subsequent action.”
III. ANALYSIS
The Defendants move to dismiss on two separate grounds—first, that
collateral estoppel or res judicata preclude the Plaintiff from litigating demand
futility yet again, and second, even if collateral estoppel or res judicata do not
apply, that the Plaintiff has not satisfied its burden to show demand is excused as
futile.
Before turning to these arguments on the Motion to Dismiss, I think it is
worthwhile to consider briefly the context of the derivative action here. The
Plaintiff is alleging a breach of the duty of loyalty by a failure to act in good faith
on the part of the Defendants for “knowingly and/or recklessly fail[ing] to ensure
that the risk management and procedures designed and implemented for the
Company were consistent with the Company’s corporate strategy and risk profile
[and] by failing to ensure that JPMorgan properly identified and managed known
risks in its lines of business?“8 The Defendants “acted disloyally to JPMorgan,
“7 Gramatarz Home Investors Corp. v. Lopez, 386 N.E.2d 1328, 1331 (N.Y. 1979). As noted
below, there is no difference between New York law and federal law as it relates to collateral
estoppel and res judicata.
“8 Compl. 11374.
34
thereby, violating and breaching their fiduciary duties of oversight, good faith,
honesty, and loyalty.”1 19
The allegations here involve, primarily, a failure to adequately assess
business risk at JPMorgan. The Complaint’s primary allegation is that the
directors, through the Audit Committee and otherwise, were well aware that the
operation of the C10 in the years before 2012 involved substantially increasing
risk, revenue, and profit, and that the directors failed to act, apparently willing to
accept the increased risk and enjoy the increased profit, a policy that proved
spectacularly ill-conceived. It is not entirely clear under what circumstances a
stockholder derivative plaintiff can prevail against the directors on a theory of
oversight liability for failure to monitor business risk under Delaware law; the
Plaintiff cites no examples where such an action has successfully been maintained.
Business risk is the very stuff of which corporate decisions are constituted. 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 that hindsight, brands wrongful, it is difficult to see how successful
maintenance of that derivative action can be consistent with this jurisdiction’s
3 _ _ =_ —— . _ =;§;
“9 Id. fl 375. I note that these four “duties” in fact implicate the duty of loyalty.
3 5
model of corporate governance, short of circumstances that would support a waste
- 120
claim.
Assuming failure to oversee business risk can support a Caremark—style
action, to state a claim in light of the exculpatory provision enjoyed by the
directors here, a stockholder derivative plaintiff would have to plead with
particularity that “the board consciously failed to implement any sort of risk
monitoring system or, having implemented such a system, consciously disregarded
red flags signaling that the company's employees were taking facially improper,
and not just ex-post ill—advised or even bone-headed, business risks.”m
With this context of the underlying cause of action in mind, I turn to the
Defendants’ arguments in favor of their Motion to Dismiss. I am cognizant that I
must “address exclusively” the issue-preclusion portion of the Motion to
Dismiss;122 only if the Plaintiff survives the Defendants’ assertion of collateral
estoppel may I turn to the issue of demand futility, to which the analysis above
might prove pertinent.
' ¢:_.:a=a__=___.—____—.===_:_—_———— _—\-o:.
'20 The reader is referred to the cogent discussion of this issue by then-Chancellor Chandler in In
re Citigroup Inc. S’holder Derivative Litig, 964 A.2d 106 (Del. Ch. 2009).
‘2‘ In re Goldman Sachs Gm, Inc. S’holder Litig, 2011 WL 4826104, at *22 n.217 (Del. Ch.
Oct. 12, 2011).
m Pyott v. Louisiana Mun. Police Employees ’ Retirement System, 74 A.3d 612, 616 (Del. 2013).
36
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A. Issue Preclusion under New York Law
The Defendants here argue that the Plaintiff may not relitigate the issue of
demand futility previously decided by the New York courts because of the
applicability of collateral estoppel and resjudicata.
Collateral estoppel applies to prohibit relitigation of factual issues previously
adjudicated; res judicata bars entirely a suit that is based on the same cause of
action between the same parties as an action previously decided on the merits.123
In this case and at this stage in the litigation, the effect is essentially the same—if
collateral estoppel applies to bar re—litigation of the issue of demand fiitility, this
action cannot go forward because the Plaintiff will have failed to satisfy the
requirements of Rule 23.1, and therefore lack standing to proceed.124 Because I
find collateral estoppel applicable here, I need not consider res judicata further.
Judgments by other courts, both state and federal, must be given the same
force and effect in this Court as they would be given in the “rendering court.”125
Even in the derivative context, which invokes the internal affairs doctrine, “[o]nce
'23 See, 6.
g., MG. Bancorporation, Inc. v. Le Beau, 737 A.2d 513 (Del. 1999).
124 The Defendants’ arguments focus primarily on collateral estoppel. See Opening Br. in Supp.
of Mot. to Dismiss the Verified Derivative Compl. for Failure to Adequately Allege Demand
Futility at 25 n.13.
125 See US. Const., Art. IV, § 1 (“Full Faith and Credit shall be given in each State to the public
Acts, Records, and judicial Proceedings of every other State”); 28 U.S.C. § 1738 (“The records
and judicial proceedings of any court of any [] State . . . shall have the same full faith and credit
in every court within the United States”); Semtek Int’l Inc. v. Lockheed Martin Corp, 531 US.
497, 507—08, (finding that state courts are required to give federal judgments the same effect as
they would be given by the preclusion rules of the state in which the federal court is located); see
also Pyott, 74 A.3d at 615—16.
37
a court of competent jurisdiction has issued a final judgment, [] a successive case is
governed by the principles of collateral estoppel, under the full faith and credit
doctrine, and not by demand futility law, under the internal affairs doctrine.”126 A
motion to dismiss based on collateral estoppel is premised upon “federalism,
'comity, and finality.”127 That is, “the undisputed interest that Delaware has in
governing the internal affairs of its corporations must yield to the stronger national
interests that all state and federal courts have in respecting each other’s
judgments?”28
Here, in light of the previously decided New York Actions, I must apply
New York law in considering the elements of collateral estoppel.129 Under New
York law, two requirements must be met before collateral estoppel will bar a party
from relitigating an issue decided against it or a party with which it is in privity:
First, the party seeking the benefit of collateral estoppel must prove
that the identical issue was necessarily decided in the prior action and
is decisive in the present action. Second, the party to be precluded
from relitigating an issue must have had a full and fair opportunity to
contest the prior determination.130
_ _ —'_.— =L':
‘26 Pyott, 74 A.3d at 616.
127
128
Idaho
129 New York recognizes that its law of collateral estoppel has “no discernible difference” from
federal law. Carroll v. McKinnell, 2008 WL 731834, at *2. The Plaintiff has not raised any
difference. Accordingly, I will consider New York state law in connection with deciding
whether the New York Actions, which include both state and federal decisions, are preclusive.
'30 D’Arata v. New York Cent. Mut. Fire Ins. C0., 564 N.E.2d 634, 636 (1990)
38
risk trading, and despite the public representations that the CIO was engaging in
hedging activity.6 Even before the losses became apparent, the head trader of the
SCP, Bruno Iksil, was nicknamed the “London whale” for the large credit default
swap trades he was making on behalf of the Company.7
Concern about the whale’s trading activity was at one point infamously
characterized by the Company’s CEO as a “tempest in a teapot.” Eventually,
however, the full extent of the Company’s losses was revealed. The loss and the
belatedly-recognized events leading to it were covered extensively in the press;
examined by the United States Senate Permanent Subcommittee on Investigations;
studied by academics; and were the subject of a number of agency investigations
and stockholder lawsuits.
In connection with the trading losses and aftermath, the Plaintiff alleges, on
the part of the Board, “a sustained and systemic failure to institute and maintain
proper control or oversight of the Company’s accounting and financial reporting
practices as related to the operation of the CIO” and that the Board “improperly
’W3__“
6 The trading activity that occurred is highly technical. I do not attempt to explain the strategies
in more detail than is necessary to the pending Motion to Dismiss. The interested reader is
directed to the report of the United States Senate Permanent Subcommittee on Investigations,
JPMorgan Chase Whale Trades: A Case History ofDerivates Risks and Abuses, Mar. 15, 2013,
available at http://www.hsgac.senate.gov/subcommittees/investigations/hearings/chase-whale-
trades-a-case-history-of-derivatives-risks-and—abuses, for its factual background.
7 See e. g., Gregory Zuckerman & Katy Burne, “London Whale” Rattles Debt Market, Wall St. J .,
Apr. 6, 2012, available at
http://online.wsj.com/article/SB]0001424052702303299604577326031119412436.htm1 (cited in
Compl. 1} 289).
3
As to the question of privity, under New York law, “[i]t is well-settled that
collateral estoppel may be applied in the shareholder derivative context.”I3 1 This
principle recognizes that “shareholder plaintiffs are treated like equal and
effectively interchangeable members of a class action because their claims belong
to and are brought on behalf of the corporation” and that, accordingly, “a judgment
rendered in such an action brought on behalf of the corporation by one shareholder
will generally be effective to preclude other actions predicated on the same wrong
brought by other shareholders.“32 The Plaintiff does not point to any New York
law to the contrary.133
The next inquiry, then, is whether the party seeking operation of collateral
estoppel has carried the initial burden to demonstrate that the “same issue was
necessarily decided in a prior action,” at which point, “the burden then shifts to the
party opposing the application of collateral estoppel to demonstrate the absence of
ae—_ -_.—:_—..=_E_.—=,‘.-__ _ _____:_1__._2
13‘ Carroll ex rel Pfizer, Inc. v. McKinnell, 2008 WL 731834, at *2 (NY. Sup. Ct. Mar. 17,
2008).
‘32 Levin ex rel. Tyco Int'l Ltd. v. Kozlowskz', 2006 WL 3317048, at *10 (NY. Sup. Ct. Nov. 14,
2006) (quoting Parkoflv. General Tel. & Elecs. Corp, 53 N.Y.2d 412, 420 (1981)), afl’d sub
nom. Levin v. Kozlowski, 45 A.D.3d 387, 846 N.Y.S.2d 37 (2007).
‘33 The Plaintiff cites In re FirstEnergy S’holder Deriv. Litig, 320 F. Supp. 2d 621, 626 (ND.
Ohio 2004) for the proposition that “one shareholder’s concession on board’s independence does
not preclude others from exercising their rights to assert demand futility.” See Pl.’s Br. in Opp’n
to Defs.’ Mot. to Dismiss the Verified Derivative Compl. for Failure to Adequately Allege
Demand Futility at 33 n.13. That holding is inapposite here. A wrongful refusal case, in which a
plaintiff would have conceded board independence ex ante, is not the same as a demand futility
case contesting that precise issue. Thus, FirstEnergy turns on lack of identity of the issue
decided, not, in my view, lack of privity.
39
a full and fair opportunity to litigate the issue.”134 The Plaintiff has not argued an
absence of an opportunity to fully and fairly litigate this issue;135 accordingly, the
sole question as to the applicability of collateral estoppel is whether the Defendants
have shown the “identical issue was necessarily decided” in the New York
Actions.
B. Identity of the Issues
Correct resolution of the question set forth above necessarily requires a
proper formulation of the issue under consideration. Here, that issue involves
whether demand should be excused under Rule 23.1; specifically, whether a
majority of the Company’s directors face a substantial likelihood of personal
liability for failure to oversee risk undertaken by the CIO.136 That was the precise
_ =—._
‘34 Carroll, 2008 WL 731834, at *7; D’Arata, 564 N.E.2d at 636 (“The burden is on the party
attempting to defeat the application of collateral estoppel to establish the absence of a full and
fair opportunity to litigate”).
135 Similarly, the Plaintiff has not argued that the New York plaintiffs were “inadequate
representatives” of the class. See Pyott v. Louisiana Mun. Police Employees’ Retirement System,
74 A.3d 612, 618 (Del. 2013) (rejecting a presumption of inadequate representation for “fast
filers”).
136 The Complaint also alleged, generally, that the Director Defendants “are conflicted by []
substantial benefits” related to their service as directors—ta, “substantial salaries, stock awards
and other benefits.” Compl. 11 367. See also id. 1111 368—71. This precise issue was considered—
and rejected—by the courts in the New York Actions. See, e. g., Aff. of Christopher M. Viapiano
Ex. B 11 372 (asserting, in In re JPMorgan Chase & Co., an inability to exercise independent
judgment in the face of director compensation); In re JPMorgan Chase & Co. Derivative Litig.,
2014 WL 1297824 at *7 (S.D.N.Y. Mar. 31, 2014) (finding a failure to plead with particularity
the materiality of the compensation or personal relationships alleged). See also Aff. of
Christopher M. Viapiano Ex. C 1111 356—64 (asserting, in Wandel, disabling financial conflicts);
id. Ex. A at 5627—11 (rejecting director compensation as a basis for a lack of independence). In
any event, this argument was not raised in the briefing on the Motion to Dismiss, and, therefore,
has been waived.
40
at
question presented by the plaintiffs (and answered by the courts in the negative) in
the New York Actions. The Plaintiff here does not contend otherwise, but points
out that issue preclusion obtains only to identical issues decided in the context of i
the same “controlling facts.”137 They argue strenuously that the controlling facts in
the prior actions—unsupported as they were by the supplemental information the
Plaintiff here garnered via § 220—were substantially different from controlling
facts that I must apply in this matter.
The Plaintiff asserts that its allegations are “materially different” from those
in the New York Actions138 under the rationale in Brautigam v. Blankfein139 and
Asbestos Workers Philadelphia Pension Fund v. Bell.140 In Brautigam, the court
noted that collateral estoppel will only apply in “situations where the matter raised
in the second suit is identical in all respects with that decided in the first
proceeding and where the controlling facts and applicable legal standards remain
unchanged.”l4l In Bell, the court found collateral estoppel inapplicable “because, 'i
although similar, the facts at issue here are not identical to the factual allegations
in the prior [actions] arising out of [residential mortgage—backed securities].”142
'37 See Brautigam v. Blankfein, 8 F. Supp. 3d 395, 401 (S.D.N.Y. 2014), afl’d sub nom.
Brautigam v. Dahlback, 598 F. App'x 53 (2d Cir. 2015).
138 Pl.’s Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Derivative Compl. for Failure to
Adequately Allege Demand Futility at 26.
‘39 8 F. Supp. 3d 395.
'40 2014 WL 1272280 (N.Y. Sup. Ct. Mar. 28,2014).
'41 Brautigam, 8 F. Supp. 3d at 401 (emphasis added).
‘42 Bell, 2014 WL 1272280, at *2.
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The Defendants contend, and I agree, that these cases turn on the fact that
the there-instant and —prior actions relied on materially different conduct allegedly
giving rise to liability. Therefore, the issues presented were not identical, and
accordingly, not subject to issue preclusion.143 Brautigam involved a claim of
breach of fiduciary duty in connection with selling collateralized debt obligations
at artificially high prices; the prior action involved different collateralized debt
obligations and, thus, different conduct and controlling facts. Similarly, in Bell,
the plaintiff alleged a type of misconduct that had not been alleged in prior
44 Here, by contrast, the underlying conduct that gives rise to the
actions]
Plaintiff’s claims is the same at issue in the New York Actions.
The Plaintiff alleges that the facts underlying the issue presented in this and
the previous cases are more developed here, and are pleaded more compellingly,
and thus, that the controlling facts here are not identical to those in the New York
Actions. But that misapprehends the standard. It cannot be the case that the
“controlling facts,” which must remain “unchanged” for purposes of collateral
-——_ -
‘43 Reply Br. in Supp. of Mot. to Dismiss the Verified Derivative Compl. for Failure to
Adequately Allege Demand Futility at 13.
144 Bell, 2014 WL 1272280, at *2 (“However, the JP Morgan defendants acknowledge in their
brief that Plaintiff here is asserting ‘slightly differing factual allegations from the earlier
dismissed complaints.’ In [one prior action] the shareholders challenged the Board's actions with
regard to [residential mortgage-backed securities], but made no factual allegations that the Board
granted unfettered authority to the A & LS Committee. Meanwhile, [a second prior action] dealt
purely with the issue of mortgage foreclosure robo—signing, which is not at issue here. The
factual allegations are not identical to the prior shareholder derivative actions and thus, collateral
estoppel is inapplicable to bar this action”).
42
estoppel,145 are simply those facts presented in the complaint. If that were the case,
collateral estoppel would never apply and the plaintiff could litigate serially by
endlessly alleging more factual support for the proposition he chooses to
advance—this is clearly contrary to the efficiency and fairness principles
underlying collateral estoppel.146 The “controlling facts” that must be identical are
those that actually obtain to the issue, only a subset of which will typically be pled:
it is the Plaintiff’s burden to plead sufficient of the material facts to survive a
motion to dismiss. That is to say, the underlying conduct is what is at issue, not
whether the Complaint raises additional facts, or a more compelling
characterization of those facts, regarding the same conduct previously at issue.147
Those in privity with the Plaintiff here alleged (insufficiently) that the Board was
unable to act due to a substantial likelihood of liability, thus excusing demand.
Their actions were dismissed for failure to comply with Rule 23.1148 and the
Plaintiff here is collaterally stopped from re—litigating that identical issue.
145 See Brautigam, 8 F. Supp. 3d at 401.
‘46 See, e.g., Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 455, 482 N.E.2d 63, 67 (1985)
(“[Collateral estoppel] is a doctrine intended to reduce litigation and conserve the resources of
the court and litigants and it is based upon the general notion that it is not fair to permit a party to
relitigate an issue that has already been decided against it.”).
'47 A dismissal with prejudice cannot be avoided through repleading the precise cause of action,
with more facts alleged—that would obliterate the distinction between dismissal with, and
without, prejudice.
'48 In re JPMorgan Chase & C0. Derivative Liiig., 2014 WL 1297824 (S.D.N.Y. Mar. 31, 2014),
was dismissed with prejudice. Wandel v. Dimon, Index No. 615830/2012, was dismissed
“without prejudice for the Plaintiff to replead, if they are so advised, with respect to making a
demand subsequent to this day.” Aff. of Christopher M. Viapiano Ex. A at 58: 17—1 9. Of course,
though the dismissal was without prejudice to replead upon making demand, the Plaintiff, either
43
l .Angitional F__ :’i§gatjgns___
Even if the Plaintiff were correct that by asserting more facts, it gets another
whack at the pifiata, the facts they allege are merely cumulative to the factual
situations alleged in the prior actions. They may present a case that an awareness
of risk in the CIO, on the part of the directors, existed earlier than the facts alleged
in the prior actions had disclosed, but the fundamental allegations remain the same.
For completeness’ sake, I briefly address those allegations below.
The Plaintiff contends that the additional document production allowed it to
plead that “various Defendants were on notice, well earlier than the New York
Actions pleaded, of specific information at specific times, and, in the face of this
specific information, they deliberately failed to act to establish necessary internal
controls.”149 Specifically, the Plaintiff argues that its Complaint is different from
the prior complaints in alleging: (1) “that by March 17, 2009 [the date of an Audit
—- _.. __._ _ .
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=_— _—.._.—:—u-=._=——\_—
here or in that case, would not be able to replead the demand futility issue. For purposes of the
applicability of collateral estoppel, as distinguished from res judicata, a dismissal with prejudice
is not required to bar relitigation of facts previously adjudicated; res judicata, however, would
entirely bar a case that was previously decided on the merits. Compare D’Arata v. New York
Cent. Mut. Fire Ins. Co., 564 N.E.2d 634, 636 (N .Y. 1990) (“As this doctrine has evolved, only
two requirements must be satisfied. First, the party seeking the benefit of collateral estoppel must
prove that the identical issue was necessarily decided in the prior action and is decisive in the
present action. Second, the party to be precluded from relitigating an issue must have had a full
and fair opportunity to contest the prior determination.” (citation omitted)), with In re Hunter,
827 N.E.2d 269, 274 (N .Y. 2005) (“Under the doctrine of res judicata, 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.” (emphasis added)) and Landau v. LaRossa, Mitchell & Ross,
892 N.E.2d 380, 383 (NY. 2008) (“[A] dismissal ‘without prejudice’ lacks a necessary element
of res judicata by its terms such a judgment is not a final determination on the merits”).
'49 Pl.’s Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Derivative Compl. for Failure to
Adequately Allege Demand Futility at 27.
44
Committee meeting in which the March 2009 Audit Presentation was made15 0], the
Audit Committee knew and reported to the Board that ‘the CIO’s purportedly
conservative mission statement and risk—averse trading profile had become
inconsistent with the increased complexity of the growing portfolio;’”151 (2) that,
via the March 2009 Audit Presentation, the “Defendants became aware that the
CIO had deployed the [I]nvestment [B]ank’s trading platform ‘to handle complex
derivative trades to address the fact that its prior infrastructure could not handle the
new activities the CIO was engaging in;’”152 (3) that “no later than July 20, 2010,
the Audit Committee knew that, for the three years prior, the CIO’s business
platform ha[d] significantly shifted, increasing both ‘in size, complexity and range
of product investments’ and ‘the demands on risk management, controls,
9,3153
technology and infrastructure; and (4) a number of negative inferences arising
from the lack of documents produced in response to the Plaintiffs § 220 Demand
between 2009 and 2012.154
The Complaint, robust though it may have been in its use of documents
obtained from the § 220 Demand, pleads the identical issue that was presented to
the courts in the New York Actions. That the alleged “red flags” pled in the New
_——=——-==-——:¢_a_«_——5:5
'50 See Compl. 11 165.
151 Pl.’s Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Derivative Compl. for Failure to
Adequately Allege Demand Futility at 27—28 (quoting Compl. 11 162).
'52 1d. at 28 (quoting Compl. 11 169.
'53 Id. at 28—29 (quoting Compl. 11182)
‘54 See id. at 29—33.
45
York Actions did not date back to 2009 does not mean that the inclusion of those
facts in the Complaint renders the issue non-identical compared with the same
issue in the New York Actions. These facts were part of the universe of facts
informing the very conduct at issue in the New York Actions, and are merely
cumulative of those pled in New York. I find the decisions in those cases preclude
relitigation of the issue of whether demand is excused.
Additionally, the Plaintiff argues, “[U]nlike the New York Actions, the
Complaint alleges a substantial change in the very nature of the CIO and not
merely an additional increase in risk.”155 This “substantial change” was “distinctly
exemplified in the CIO’s integration” of the PPB technology from the Investment
Bank.156 The change in the nature of the CIO, the Plaintiff alleges, bears on both
liability and demand futility and because it was not raised in the New York
Actions, those cannot operate through collateral estoppel or res judicata to this
Complaint.157 The Plaintiff, however, is simply mistaken in the assertion that a
change in the “nature” of the CIO was omitted from the allegations in the New
York Actions. In In re JPMorgan, the plaintiffs alleged that the “CIO had been
converted into a proprietary trading desk that sought risky, short—term profits.”158
__r
'55 P1.’s Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Derivative Compl. for Failure to
Adequater Allege Demand Futility at 24.
‘56 Id. at 24.
‘57 1d. at 24—25.
‘58 Aff. of Christopher Viapiano Ex. B (the complaint there) 11 71 (emphasis added).
46
In Wandel, the plaintiff asserted that Dimon, Drew, “and other JPMorgan senior
executives[] aggressively transformed the CIO into a high-risk, proprietary trading
desk.”159 Thus, the accusation of a “change in the very nature of the CIO” was
before the New York courts deciding demand filtility.
At Oral Argument, for the first time, the Plaintiff raised an argument that
collateral estoppel should not apply because its Complaint was filed after five
agency decisions adverse to the Company had been made. One, by the SEC,
required the Company to admit fault. While the agency decisions were presented,
at least partially, as background facts in the Plaintiff’s briefing, the briefing did not
contend that these agency decisions separated the issue before me from those
decided in the New York Actions, precluding collateral estoppel, and the
Defendants had no meaningful opportunity to respond to such an argument.160
Accordingly, I find that any such argument was waived.161
C. Collateral Estoppel Bars Relitigation of the Issue of Demand F utility
Because I find that the Defendants have shown that the identical issue—
whether demand should be excused because a majority of JPMorgan’s directors
'59 Id. Ex. C (the complaint there) 1| 84 (emphasis added).
160 See also Oral Arg. Tr. at 48:13—50:5.
‘61 Emerald Partners v. Berlin, No. CIV.A. 9700, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28,
2003) (“It is settled Delaware law that a party waives an argument by not including it in its
brief”), aff’d, 840 A.2d 641 (Del. 2003).
47
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face a substantial likelihood of personal liability based on a failure to monitor the
controls and risk of CIO’s operation —was decided in the New York Actions, and
the Plaintiff has not demonstrated that its allegations involve different issues, and
because the Plaintiff has not alleged that the plaintiffs in New York lacked a full
‘i
and fair opportunity to litigate in the prior actions, I find that collateral estoppel .3
applies and the issue of demand futility cannot be relitigated.
In light of that finding, I need not—and, indeed, should not—reach the
merits of the demand futility argument.
IV. CONCLUSION
For the foregoing reasons, I grant the Defendants’ Motion. An appropriate
order accompanies this Memorandum Opinion.
48
transformed or permitted the transformation of its function from hedging the
bank’s investment risk to highly leveraged speculative trading.”8 The Plaintiff
seeks to pursue its derivative claim without having made demand on the Board,
alleging that demand would be futile because the majority of the Board is
interested or not independent. The Plaintiff alleges that a majority of the Board
could not impartially consider demand because they face a substantial likelihood of
personal liability in connection with alleged breaches of the duty of loyalty for
failure in their oversight function, as well as for material misstatements or
omissions in SEC filings between 2009 and 2011.9 The Plaintiff also alleges a lack
of independence due to the compensation and benefits connected with the
directors’ service on the Board.10
A. The Parties
The Plaintiff has continuously held stock in the Company at all relevant
times. The Defendants in this action include current and former members of the
Board, and current and former officers, discussed below.
1.:Qrgctor Deferglgnt;
Seven of the named defendants who are currently on the Board joined the
Board prior to January 1, 2009: Crandall C. Bowles, Stephen B. Burke, James S.
8 Compl. 11 2.
9See id. 1111350—51.
‘0 See id. W 367—71.
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ASBESTOS WORKERS LOCAL 42
PENSION FUND, derivatively on behalf
of Nominal Defendant JPMORGAN
CHASE & CO., a Delaware corporation,
Plaintiff,
)
)
)
)
)
)
)
v.2. ) CA. No. 9772—VCG
)
LINDA B. BAMMANN, JAMES A. )
BELL, CRANDALL C. BOWLES, )
STEPHEN B. BURKE, DAVID M. )
COTE, JAMES S. CROWN, JAMIE )
DIMON, TIMOTHY P. FLYNN, )
ELLEN V. FUTTER, LABAN P. )
JACKSON, MICHAEL A. NEAL, )
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
DAVID C. NOVAK, LEE R.
RAYMOND, WILLIAM WELDON,
DOUGLAS L. BRAUNSTEIN,
MICHAEL CAVANAGH, INA DREW,
IRVIN GOLDMAN, JOHN HOGAN,
PETER WEILAND, JOHN WILMOT,
AND BARRY ZUBROW,
Defendants,
and
JPMORGAN CHASE & CO.,
Nominal Defendant.
WORDER.
I
AND NOW, this let day of May, 2015,
The Court having considered the Defendants’ Motion to Dismiss the 3:
Verified Derivative Complaint for Failure to Plead Demand Futility (the
“Motion”), and for the reasons set forth in the Memorandum Opinion dated May
21, 2015, IT IS HEREBY ORDERED that the Defendants’ Motion is GRANTED.
so ORDERED:
Vice Chancellor
Crown, Jamie Dimon, Laban P. Jackson, Jr., Lee R. Raymond, and William C.
Weldon (the “2009 Director Defendants”). James A. Bell joined the Board prior to
May 10, 2012, when the CIO losses were revealed (together with the 2009 Director
Defendants, the “CIO Director Defendants”).
Three of the named defendants were members of the Board at the time of the
complained-of actions, but are no longer on the Board: David M. Cote, Ellen V.
Futter and David C. Novak (together, the “Former Director Defendants”),
Additionally, three of the named defendants joined the Board after the events
leading to the CIO losses occurred: Linda B. Bammann, who joined the Board in
September 2013, Timothy P. Flynn, who joined the Board in May of 2012, and
Michael A. Neal, who joined the Board in January 2014 (together with the CIO
Director Defendants and the Former Director Defendants, the “Director
Defendants”).
2. Officer Defendants,
Douglas L. Braunstein was the Company’s Executive Vice President and
CFO from June 22, 2010 to January 1, 2013, at which time he became Vice
Chairman.
Michael J. Cavanagh served as the Company’s Executive Vice President and
CFO from 2004 until May 2010, at which time he became CEO of the Company’s
Treasury and Securities Services Business until May 2012, at which time he
became Co—CEO of the Company’s Corporate & Investment Bank, which position
he currently holds. He was on the Company’s Operating Committee at all relevant
times.
Ina Drew was the Company’s Chief Investment Officer from February 2005
until May 13, 2012. She was also a member of the Operating Committee at all
relevant times.
Irvin Goldman was the CIO’s Chief Risk Officer (“CRO”) from January
2012 through May 2012, at which time, Plaintiff alleges, he was stripped of his
duties prior to his resignation in July 2012. He previously served as the CIO’s
Head of Strategy.
John Hogan was the Company’s CRO from January 2012 through early
2013. Upon returning from a brief leave of absence, he was named Chairman of
Risk. He is also a member of the Company’s Operating Committee, and has been
since January 2012.
Peter Weiland was the CIO’s Head of Market Risk, its most senior risk
officer, from late 2008 through early 2012. He reported to Barry Zubrow and to
Drew from 2009 until mid—January 2012. He announced his retirement in October
2012.
.—.-.-.-».-.-m-w_-M. u».-;,-.n-.-m—;.m-mmm.m flmh'AYthov
John Wilmot was the CFO of the CIO beginning in January 2011 and
“resigned in connection with the CIO scandal.”“
Barry Zubrow was the Company’s head of Corporate and Regulatory Affairs
from January 2012 to February 2013. He previously served as the CRO from
November 2007 to January 2012. He also served on the Company’s Operating
Committee from 2010 until October 2012, when he announced his retirement
effective February 2013.
Zubrow, Wilmot, Weiland, Hogan, Goldman, Drew, Cavanagh, and
Braunstein are referred to as the “Officer Defendants.”
3 - @evsnegomimgfijfig.
The Board’s Audit Committee is charged with overseeing the Company’s
risk assessment and management process.12 Of the Director Defendants, Bell,
Bowles, and Jackson serve on the Audit Committee. The Risk Policy Committee
“oversees the CEO and management’s responsibilities to assess and manage
JPMorgan’s various types of risk,” including credit, market, interest rate,
investment, liquidity, and reputational risks.l3 Crown is the Chairman of the Risk
Policy Committee, and from 2008 to May 2012, former-directors Cote and Futter
‘1 See id. 1144.
‘2 See id. 1162.
‘3 Id. 11 76.
were members of the Committee. Flynn joined the Risk Policy Committee in
August 2012.14
The Company maintains a firm-wide operation run by the Company’s CRO,
independent of the Company’s individual lines of business, referred to as “Risk
‘7;
Management?”5
B. Overview
The Plaintiff alleges breaches of the 'duty of loyalty, by way of a lack of
good faith, in “remain[ing] willfully blind” “in the face of [] red flags” which
showed the CIO to be engaging in higher-risk activity than represented.16 The
essence of the derivative action is that, despite the risky trading undertaken by the I;
CIO, “the Board failed to ensure the implementation of a risk management
structure commensurate” with that risk.17
Prior to filing the Complaint, the Plaintiff undertook a § 220 demand (the “§
220 Demand”) and obtained and reviewed documents dating back to 2009 from l
which it alleges what the Board and relevant committees knew, and when. The _,
Plaintiff asks me to draw negative inferences from what was not produced.18 What
follows is an overview of the facts alleged in the Complaint; I do not aim to
‘4 See id. 11 82.
15See 12111119. II
16 P1.’s Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Derivative Compl. for Failure to
Adequately Allege Demand Futility at 4; see also Compl. 119.
17 Pl.’s Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Derivative Compl. for Failure to
Adequately Allege Demand Futility at 5.
'3 See Compl. 1111 88—113.