JP Morgan Chase 2010 Annual Report Download - page 284

Notes to consolidated financial statements
284 JPMorgan Chase & Co./2010 Annual Report
started in May 2010. Although the Firm is not charged with any
crime and does not face criminal liability, if one or more of its
employees were found guilty, the Firm could be subject to adminis-
trative sanctions, including restrictions on its ability to conduct
business in Italy and monetary penalties. In the initial hearings, the
City successfully applied to join some of the claims in the civil
proceedings against the individuals and JPMorgan Chase Bank,
N.A. to the criminal proceedings. In addition, a consumer associa-
tion has also been given leave to join the criminal proceedings to
seek damages from the defendant banks.
Enron Litigation. JPMorgan Chase and certain of its officers and
directors are involved in several lawsuits that together seek sub-
stantial damages arising out of the Firm’s banking relationships
with Enron Corp. and its subsidiaries (“Enron”). A number of
actions and other proceedings against the Firm previously were
resolved, including a class action lawsuit captioned Newby v. Enron
Corp. and adversary proceedings brought by Enron’s bankruptcy
estate. The remaining Enron-related actions include individual
actions by Enron investors, an action by an Enron counterparty, and
a purported class action filed on behalf of JPMorgan Chase em-
ployees who participated in the Firm’s 401(k) plan asserting claims
under the ERISA for alleged breaches of fiduciary duties by JPMor-
gan Chase, its directors and named officers. That action has been
dismissed, and is on appeal to the United States Court of Appeals
for the Second Circuit.
Interchange Litigation. A group of merchants has filed a series of
putative class action complaints in several federal courts. The
complaints allege that VISA and MasterCard, as well as certain
other banks and their respective bank holding companies, con-
spired to set the price of credit and debit card interchange fees,
enacted respective association rules in violation of anti-trust laws,
and engaged in tying/bundling and exclusive dealing. The com-
plaint seeks unspecified damages and injunctive relief based on the
theory that interchange would be lower or eliminated but for the
challenged conduct. Based on publicly available estimates, Visa and
MasterCard branded payment cards generated approximately $40
billion of interchange fees industry-wide in 2009. All cases have
been consolidated in the United States District Court for the Eastern
District of New York for pretrial proceedings. The Court has dis-
missed all claims relating to periods prior to January 2004. The
Court has not yet ruled on motions relating to the remainder of the
case. Fact and expert discovery in the case have closed. The plain-
tiffs have filed a motion seeking class certification, and the defen-
dants have opposed that motion. The Court has not yet ruled on
the class certification motion.
In addition to the consolidated class action complaint, plaintiffs
filed supplemental complaints challenging the initial public offer-
ings (“IPOs”) of MasterCard and Visa (the “IPO Complaints”). With
respect to the MasterCard IPO, plaintiffs allege that the offering
violated Section 7 of the Clayton Act and Section 1 of the Sherman
Act and that the offering was a fraudulent conveyance. With re-
spect to the Visa IPO, plaintiffs are challenging the Visa IPO on
antitrust theories parallel to those articulated in the MasterCard
IPO pleading. Defendants have filed motions to dismiss the IPO
Complaints. The Court has not yet ruled on those motions.
Investment Management Litigation. Four cases have been filed
claiming that investment portfolios managed by JPMorgan Invest-
ment Management Inc. (“JPMorgan Investment Management”)
were inappropriately invested in securities backed by subprime
residential real estate collateral. Plaintiffs claim that JPMorgan
Investment Management and related defendants are liable for
losses of more than $1 billion in market value of these securities.
The first case was filed by NM Homes One, Inc. in federal District
Court in New York, and the Court granted JPMorgan Chase Bank,
N.A.’s motion to dismiss nine of plaintiff’s ten causes of action,
leaving a breach of contract claim. The Court thereafter granted the
plaintiff’s motion for reconsideration and reinstated the common
law non-fraud claims for breach of fiduciary duty, negligence, and
gross negligence. The plaintiff withdrew its claim for negligent
misrepresentation. The Firm has filed a renewed motion to dismiss
the common law non-fraud claims and a motion for judgment on
the pleadings as to the breach of contract claim. In the second
case, which was filed by Assured Guaranty (U.K.) in New York state
court, the New York State Appellate Division allowed plaintiff to
proceed with its claims for breach of fiduciary duty and gross negli-
gence, and for breach of contract based on alleged violations of the
Delaware Insurance Code. The Firm sought and has obtained leave
to appeal to the New York State Court of Appeals the decision by
the Appellate Division to allow the breach of fiduciary duty and
gross negligence claims to proceed. In the third case, filed by
Ambac Assurance UK Limited in New York state court, the lower
court granted JPMorgan Investment Management’s motion to
dismiss, and plaintiff has filed a notice of appeal. The fourth case
was filed by CMMF LLP in New York state court; the lower court
granted JPMorgan Investment Management’s motion to dismiss the
claims, other than claims for breach of contract and negligent
misrepresentation. The Appellate Division affirmed the lower
court’s decision. Plaintiff has since filed an amended complaint
seeking to assert claims under New York law for breach of fiduciary
duty, gross negligence, breach of contract and negligent misrepre-
sentation.
Lehman Brothers Bankruptcy Proceedings. In March 2010, the
Examiner appointed by the Bankruptcy Court presiding over the
Chapter 11 bankruptcy proceedings of Lehman Brothers Holdings
Inc (“LBHI”) and several of its subsidiaries (collectively, “Lehman”)
released a report as to his investigation into Lehman’s failure and
related matters. The Examiner concluded that one common law
claim potentially could be asserted against the Firm for contributing
to Lehman’s failure, though he characterized the claim as “not
strong.” The Examiner also opined that certain cash and securities
collateral provided by LBHI to the Firm in the weeks and days
preceding LBHI’s demise potentially could be challenged under the
Bankruptcy Code’s fraudulent conveyance or preference provisions,
though the Firm is of the view that its right to such collateral is
protected by the Bankruptcy Code’s safe harbor provisions. In May
2010, LBHI and its Official Committee of Unsecured Creditors filed
an adversary proceeding against JPMorgan Chase Bank, N.A. in the