Bd. of Trs. of the Aftra Ret. Fund v. JPMorgan Chase Bank, N.A.

Decision Date05 August 2011
Docket NumberNos. 09 Civ. 686 (SAS),09 Civ. 3020 (SAS),09 Civ. 4408 (SAS).,s. 09 Civ. 686 (SAS)
Citation51 Employee Benefits Cas. 2351,806 F.Supp.2d 662
PartiesBOARD OF TRUSTEES OF the AFTRA RETIREMENT FUND, in its capacity as a fiduciary of the AFTRA Retirement Fund, individually and on behalf of all others similarly situated, Plaintiff, v. JPMORGAN CHASE BANK, N.A., Defendant.Board of Trustees of the Imperial County Employees' Retirement System, in its capacity as a fiduciary of the Imperial County Employees' Retirement System, individually and on behalf of all others similarly situated, Plaintiff, v. JPMorgan Chase Bank, N.A., Defendant.The Investment Committee of the Manhattan and Bronx Surface Transit Operating Authority Pension Plan, in its capacity as a fiduciary of the MaBSTOA Pension Plan, individually and on behalf of all others similarly situated, Plaintiff, v. JPMorgan Chase Bank, N.A., Defendant.
CourtU.S. District Court — Southern District of New York

OPINION TEXT STARTS HERE

Joseph H. Meltzer, Esq., Peter H. LeVan, Jr., Esq., Barroway Topaz Kessler Meltzer & Check, LLP, Radnor, PA, Bradley E. Beckworth, Esq., Brad Seidel, Esq., Nix Patterson & Roach, LLP, Daingerfield, TX, Milo Silberstein, Esq., Dealy & Silberstein, LLP, David L. Wales, Esq., Bernstein, Litowitz, Berger & Grossman, LLP, Gregory M. Nespole, Esq., Wolf Haldenstein Adler Freeman Herz LLP, New York, NY, for Plaintiffs.

Lewis Richard Clayton, Esq., Jonathan H. Hurwitz, Esq., Samuel E. Bonderoff, Esq., Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for JPMC.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge:I. INTRODUCTION

This class action arises out of JPMorgan Chase Bank, N.A.'s (“JPMC's”) investment of certain “securities lending” clients' cash collateral in the June 2009 Medium–Term Notes (the “MTNs”) of Sigma Finance, Inc. (“Sigma”), a structured investment vehicle (“SIV”) that collapsed on September 30, 2008. 1 Class members governed by the Employee Retirement Income Security Act (ERISA) assert claims for breach of the fiduciary duty to prudently and loyally manage plan assets (the “prudence claim”) and for breach of the fiduciary duty of loyalty, which encompasses the obligation to avoid conflicts of interest (the “duty of loyalty” claim). Class members not governed by ERISA assert analogous prudence and duty of loyalty claims under New York common law, in addition to breach of their securities lending agreements with JPMC.

Both JPMC and Plaintiffs now move for partial summary judgment on Plaintiffs' claims that JPMC breached its duties of loyalty by investing its fiduciary clients' cash collateral in the 2009 Sigma MTNs while simultaneously extending billions of dollars of “repo” financing to Sigma. According to Plaintiffs,

[t]he evidence of record ... establishes that [JPMC] predicted Sigma's collapse; engaged in predatory repo with substantial haircuts to ‘cherry-pick’ the best assets in Sigma's portfolio for itself, immediately depleted the quantity and quality of Sigma's assets by taking title to assets in an amount that exceeded the financing it provided by nearly a billion dollars; and ultimately reaped nearly $2 billion of profits for itself while leaving the Class' notes virtually worthless.2 Plaintiffs also move for summary judgment that JPMC's “fail[ure] to disclose material information to the Class” 3 related to that repo financing also breached its duty of loyalty to the Class.

JPMC's motion is granted, and Plaintiffs' motions are denied. While JPMC may have breached its duties to prudently manage plan assets—claims that are not at issue on this motion—its extension of repo financing to a non-fiduciary client (Sigma) in a non-fiduciary capacity did not constitute a conflict of interest. Nor did JPMC's extension of repo financing cause Plaintiffs' losses, which forecloses Plaintiffs' duty of loyalty claims. Moreover, there is no evidence—and Plaintiffs' duty of loyalty claim is not based on the theory—that JPMC's status as a repo financier to Sigma influenced its management of plan assets, or that JPMC's failure to disclose that status was somehow motivated by a desire to protect itself to the detriment of its fiduciary clients. Thus, Plaintiffs' claim that JPMC further breached its duties of loyalty by failing to disclose that status also fails.

II. BACKGROUNDA. Repurchase Agreements

A repurchase agreement (“repo”) is a form of financing structured as a sale of securities with a simultaneous agreement to repurchase them at a later date.4 “In effect, a repurchase agreement is a loan in the amount of the proceeds of the original sale, collateralized by the [security], with interest equal to the difference between the sale and repurchase prices.” 5 The borrower and lender in a repo transaction agree to a certain “haircut”—a percentage discount that the lender applies to the market value of the repo'd assets, providing the lender with additional protection in the event that the value of the asset declines.6 Although the borrower passes legal title to the securities to the lender, it retains both the economic benefits and market risk of the transferred collateral through retained beneficial ownership, and continues to mark-to-market the price of the security on its balance sheet.7

In mid–2008, repo activity was estimated to exceed ten trillion dollars in the American market (or seventy percent of U.S. GDP), and another six trillion euros in the European market (or sixty-five percent of Euro area GDP). 8 B. Federal Banking Regulations Governing Multi–Service Financial Institutions

In 1999, Congress enacted the Gramm–Leach–Bliley Financial Services Modernization Act permitting modern multi-service diversified financial institutions to provide asset management, retail and commercial banking, investment banking, insurance, and treasury and securities services.9 The purpose of the Act, which repealed certain provisions of the Glass–Steagall Act, was “to reduce and, to the maximum extent practicable, to eliminate the legal barriers preventing affiliation among depository institutions, securities firms, insurance companies, and other financial service providers.” 10

Since 1913, federal law has also permitted national banks to manage trust accounts while simultaneously engaging in commercial lending 11 (to which repo financing is the functional equivalent). For example, the Office of the Comptroller of the Currency (the “OCC”), the federal agency charged with the chartering, regulation, and supervision of national banks (including JPMC) under the National Bank Act, permits the commercial arm of a national bank to make secured loans directly to a fiduciary client.12 The Federal Deposit Insurance Corporation (the “FDIC”), the primary federal regulator for the 4,900 state-chartered banks that do not join the Federal Reserve System, also permits the simultaneous investment of fiduciary assets and commercial bank lending with respect to the same issuer, provided that an information barrier is in place.13 Moreover, legislation passed in the aftermath of the financial crisis of 20072009 does not contemplate the disaggregation of banks' fiduciary asset management and corporate finance functions.14

1. Information Barriers

Before section 10(b) of the Securities Exchange Act of 1934 15 and Rule 10b–5 16 promulgated thereunder prohibited trading on material inside information,

a standard part of the investment decision making process of commercial bank trust departments involved seeking out and evaluating information about issuers of securities from commercial or other department files and personnel. This practice may have been thought to be dictated by a fiduciary's duty to use any relevant information available to it in making decisions for the benefit of the trust.... [However,] [t]his traditional view of a fiduciary's responsibility to isolate and use inside information was upset by a series of rule 10b–5 cases ... in which the [Securities Exchange Commission] adopted and enforced the principle that the recipient of material inside information about a publicly traded security must either disclose such information to the public or abstain from trading in or recommending the securities involved until the information is adequately disclosed to the public. In these cases, the Commission has consistently taken the position that a fiduciary's duty to obey rule 10b–5 is paramount to its common law duty to use material inside information in making investment decisions.... Consistent with the doctrine that it is misuse of material inside information which is illegal—not mere possession of such information—and that inferences of misuse may be overcome where the facts establish an absence of misuse, the Commission has repeatedly encouraged financial institutions possessing material inside information to adopt internal procedures to preserve the confidentiality of such information and to prevent misuse thereof by employees engaged in securities trading in the public market. The desirability of such procedures for commercial banks with trust departments has been stressed by the Commission .... For banks the purpose of these procedures is to prevent material inside information acquired by the bank's commercial department from being communicated to persons in the trust department who have discretion to invest for, or give advice to trust customers with regard to, investing in publicly traded securities. It is these procedures which are usually referred to as the Wall or Chinese Wall. 17

OCC regulations require a national bank exercising fiduciary powers to “adopt and follow written policies and procedures adequate to maintain its fiduciary activities in compliance with applicable law,” including [m]ethods for ensuring that fiduciary officers and employees do not use material inside information in connection with any decision or recommendation to purchase or sell any security” and [m]ethods for preventing self-dealing and conflicts of interest.” 18 According to the OCC, [a] so-called...

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