JPMorgan Wins Dismissal of Financial Spoofing Lawsuit

Paul, Weiss and co-defendants’ counsel won the dismissal of a shareholder derivative lawsuit against JPMorgan Chase, certain executive officers and its board of directors stemming from the bank’s 2020 resolutions with various regulators over various financial “spoofing” trading violations. Paul, Weiss represents 10 individual defendants in the case.

In the lawsuit, filed in New York Supreme Court in Westchester County in July 2022, a current JPMorgan shareholder alleged that the individual defendants breached their fiduciary duties by failing to implement a system of internal controls to prevent financial spoofing—a form of market manipulation involving the rapid placement of buy or sell orders with the intent to cancel those orders before execution—thus allowing the bank and two subsidiaries to engage in an eight-year-long trading scheme in the Treasury futures and precious metals markets. The trading violations resulted in agreements with the DOJ, the CFTC and the SEC.

The plaintiff argued that the board had wrongfully refused her pre-suit demand in 2021. The board had referred the demand to the bank’s market compliance committee, which conducted an investigation and then recommended to the full board to reject it. In her lawsuit, the plaintiff claimed that the compliance committee’s review had not been conducted reasonably, independently and in good faith, and that the bank had already “publicly admitted to wrongdoing when it entered into settlements with federal government agencies.”

In dismissing the suit in its entirety, Justice Gretchen Walsh found that Delaware law applied, noting that Delaware “has a strong presumption in favor of the business judgment rule,” and that under Delaware law, “directors, rather than shareholders, manage the business and affairs of the corporation.” The decision to bring litigation on behalf of a company “is a quintessential exercise of business judgment,” she wrote. The judge also held that the plaintiff failed to allege any facts showing that the board was grossly negligent or acted in bad faith in referring the demand to the compliance committee for investigation, thus failing to meet the bar for demand refusal. Because the plaintiff made a pre-suit demand upon the board, “any argument that the board was interested, conflicted, or otherwise lacked independence was foreclosed,” and the board was “entitled to consult with whoever it saw fit… to advise it on the merits of Plaintiff’s claim,” including forming a review committee instead of appointing a special litigation committee. The judge also rejected the plaintiff’s argument that the compliance committee’s failure to interview the regulators who investigated JPMorgan’s spoofing scheme indicated wrongful refusal, explaining that, under Delaware law, “choices regarding which interview subjects are appropriate to an investigative process are a matter of business judgment.”

The Paul, Weiss team included litigation partners Brad Karp, Loretta Lynch and Audra Soloway.