In a lawsuit suggesting a new area of potential liability
for corporate directors and officers, a shareholder of J.P. Morgan Chase has
filed a derivative lawsuit against the company, as nominal defendant, and
certain of its directors and officers alleging breaches of fiduciary duty in
connection with the company's recent $88.3 settlement with the U.S. Department
of Treasury's Office of Foreign Assets Control (OFAC). A copy of the derivative
lawsuit complaint, filed September 6, 2011 in the Southern District of New
York, can be found here.
OFAC is responsible for the administration of various
trade sanctions regulations. In an August 25, 2011 press release, OFAC
that J.P. Morgan had agreed to pay $88.3 million to settle alleged
violations of U.S. trade sanction regulations. Among other things, the OFAC
press release described three alleged violations it characterized as
"egregious." Among the programs that OFAC alleged that the company had violated
are those involving sanctions against Cuba, Iran and Sudan. The OFAC press
release described the settlement as the largest settlement to date obtained by
On September 6, 2011, the Louisiana Municipal Police
Employee Retirement System filed a derivative lawsuit in the Southern District
of New York, naming eleven directors and officers of J.P. Morgan as defendants.
The complaint alleges that the defendants "knowingly allowed and rewarded the
Company's violations of The U.S. Department of Treasury's multiple sanctions
programs." The lawsuit alleges that "the misconduct occurred, unchecked, under
the Defendants' watch because of their complicity in the improprieties alleged
herein." The lawsuit seeks to "recover damages caused by the Individual
Defendants' unlawful course of conduct and breaches of fiduciary
duty." Among other damages alleged are "the costs to the Company
associated with the settlement, remedial measures, damage to goodwill and
increased regulatory scrutiny."
As reflected in a September 23, 2011 memo from the Fried
Frank law firm entitled "State Pension Plan Files Claim Seeking $88.3 Million
OFAC Penalty" (here),
among the implications of these developments is that "OFAC violations can have
significant follow-on consequences for not only the company --- but officers
and directors as well." The payment of a settlement "sometimes is just the
beginning," as a settlement "can spark the attention of shareholders and result
in the filing of a derivative lawsuit to hold officers and directors liable for
repayment of any amounts paid in settlement."
The prospect of a follow-on civil lawsuit following a
civil settlement for OFAC violations raises a number of interesting challenges,
particularly from an insurance standpoint. The settlement amount itself would
not be covered under the typical D&O policy. The defense costs the defendants
incur in a follow-on civil lawsuit would likely be covered. The interesting
question comes in with respect to the damages alleged in the follow-on lawsuit.
The question of the coverage for the alleged damages is analogous to the
damages claimed in the follow-on civil actions filed following companies'
payment of Foreign Corrupt Practices settlements (about which refer here).
The complaint itself in this action actually has some
things to say about D&O insurance. In arguing that its failure to make a
pre-litigation demand on the J.P. Morgan board ought to be excused as futile,
the plaintiff argues among other things that if the board were to sue
themselves or other officers in connection with the OFAC violations, the claim
would run afoul of the D&O policy's Insured vs. Insured exclusion and
therefore "there would be no directors' and officers' insurance protection"
which is a "reason why they will not bring a suit." The complaint notes that
the Insured vs. Insured exclusion will not apply if the suit is brought
Although the Insured vs. Insured exclusion would not
apply to the plaintiff's derivative suit, it remains an interesting question of
what position the carrier would take with respect to the damages that the
plaintiff seeks to recover. In any event, the lawsuit raises the possibility of
a potentially significant new liability exposure for directors and officers of
company's engaging in transactions subject to OFAC's oversight.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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