Blowing the Whistle

Proving again that shareholders no longer are willing to tolerate systemic shortcomings from those in charge of public companies, the Louisiana Municipal Police Employees Retirement System has filed a shareholders lawsuit in the Southern District of New York against the officers and directors of JPMorgan Chase.

The lawsuit seeks more than mere recovery of the $88.3 million paid by the bank to settle violations of Office of Foreign Assets Control regulations regarding transactions involving Cuba, Iran and Sudan. It says those officers and directors also should have to repay the cost of any remedial measures as well as damage to the bank’s goodwill and the costs of the increased regulatory scrutiny, all based upon assertions of breach of fiduciary duty, unjust enrichment, gross mismanagement and waste of corporate assets.

Two issues make this lawsuit noteworthy. First, while Occupy Wall Street plays out on the streets, the case reinforces the impatience of shareholders no longer willing to allow the wasting of corporate money, especially when it involves significant violations of U.S. law. The case also proves, again, that when a company faces allegations from the government, it needs to make sure it has current and adequate internal controls in place. When it doesn’t, it must be careful what it concedes in the compromise agreement.

JPMorgan’s OFAC settlement included references to more than 1,700 wire transfers involving Cuban citizens and fund transfers totaling $178.5 million. Another bank notified JPMorgan about the violations, and JPMorgan began its own investigation, which confirmed the breach. JPMorgan filed a voluntary self-disclosure, but did not take adequate steps to stop the practice — a basic rule when violations are discovered and self-reported — according to OFAC. What seems readily apparent is the sheer quantity of violations likely result from a lack of internal controls.

There was also a transaction involving Iran. Specifically, OFAC asserted JPMorgan violated rules sanctioning weapons of mass destruction proliferators in the course of arranging a $2.9 million trade loan to a bank issuer of a letter of credit for a transaction involving a vessel affiliated with an Iranian shipping company. When JPMorgan realized a violation had occurred, it waited three months to submit the disclosure. The timing obviously irked OFAC. Further, OFAC asserted JPMorgan failed to provide complete documentation in response to an OFAC administrative subpoena.

OFAC also said JPMorgan failed to produce several requested documents regarding a wire transfer referencing Khartoum, Sudan. The problem here was flunking the attitude test: You don’t allow a government regulator to conclude you aren’t producing all of the required documents in response to an administrative subpoena.

As is the norm when cases settle, information about the case was published. OFAC characterized the violations as “egregious,” meaning a particularly serious violation occurred, at least from the agency’s perspective. A serious violation leads to strong enforcement that translates into a significant fine. Such language obviously caught the ear of the retirement fund, which decided to do something about it.

The Louisiana Municipal Police Employees Retirement System accused Morgan’s board of directors of knowingly allowing the alleged illegal transactions that led to the OFAC settlement.

“The present board embraced or recklessly disregarded the companywide business strategy based upon repeated and systematic violations of federal law, safety regulation and company policy,” the retirement fund said in the complaint. “By permitting these violations of law to continue … over a prolonged period after being put on notice numerous times, the board utterly failed to exercise adequate oversight over JPMorgan.”

Such language again proves the maxim that the fault lies not just with what occurred, but it also was compounded by the failure to quickly admit the misdeeds and fix them.

The JPMorgan lawsuit follows one filed in July 2009 in the Southern District of Texas against Panalpina along with certain current and former officers and directors and owners, all of whom were in place prior to the freight forwarder’s 2005 IPO. There were issues about bribes and other questionable payments made to Nigerian government officials having to do with the energy business. When Panalpina withdrew from Nigeria, its stock price plummeted. The complaint sought damages for violations of the Securities Act, fraud and negligent misrepresentation.

This action against Panalpina is in addition to a qui tam — or whistleblower — action pending in the same judicial district in Texas. In this second case, damages and penalties are being sought under the False Claims Act and common law, in addition to penalties under the Anti-Kickback Act.

Regarding the Foreign Corrupt Practices Act violations that gave rise to the shareholder lawsuit, Panalpina pleaded guilty to certain charges. Its Swiss parent, Panalpina World Transport, entered into a deferred prosecution agreement. The total fine imposed was more than $70.5 million, enough to get anyone’s attention, especially investors.

The odds are one or both cases will be settled. The question is how long it will take and at what cost to both sides. It’s also interesting to speculate about whether the outcome would be different if the Dodd-Frank whistleblower provisions had been in place when the original complaint was made.

Susan Kohn Ross is an international trade attorney with Mitchell Silberberg & Knupp in Los Angeles. Contact her at skr@msk.com.

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