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City of Providence, Rhode Island v. Dimon

Court of Chancery of Delaware

July 29, 2015

CITY OF PROVIDENCE, RHODE ISLAND, derivatively on behalf of JPMORGAN CHASE & CO., Plaintiff,

Submitted: March 10, 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 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.


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 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 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.

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 ...

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