In re JPMorgan Chase Derivative Litig.

263 F.Supp.3d 920

IN RE JPMORGAN CHASE DERIVATIVE LITIGATION

This Document Relates to All Actions.

No. 2:13–cv–02414–KJM–EFB

United States District Court, E.D. California.

Signed June 30, 2017

ORDER

Kimberly Mueller, UNITED STATES DISTRICT JUDGE

Shareholders have brought a derivative suit against a corporation's directors for their allegedly deceitful and financially-destructive role in the 2008 housing collapse. Defendants are current and former JPMorgan Chase & Co. ("JPMorgan") directors. Plaintiffs are California-based shareholders. Plaintiffs argue defendants breached their fiduciary duties, committed securities violations, and unjustly enriched themselves through defendants' creation and sale of subprime residential mortgage-backed securities ("RMBS"). The court granted defendants' first motion to dismiss. Order Oct. 23, 2014, ECF No. 69 ("Prior Order"). Defendants have moved to dismiss plaintiffs' amended complaint, or alternatively, to transfer the case to New York. Id. Mot., ECF No. 123.

The court heard the motion on December 15, 2016. Alexandra Summer, Francis Bottini, Jr., Mark Molumphy and Kelsey Fischer appeared for plaintiffs. Mins., ECF No. 139. Stuart Baskin, Alethea Sargent and Emily Griffen appeared for defendants Bell, Bowles, Burke, Crown, Flynn, Futter, Jackson, Novak, Raymond and Weldon. Id. Gary Kubek and Christopher Banks appeared for nominal defendant JPMorgan and defendants Dimon, Harrison and Lipp. Id. As explained below, the court GRANTS defendants' motion to dismiss in part and TRANSFERS the remaining claims to the Southern District of New York.

I. BACKGROUND

Plaintiffs complain that defendants fraudulently and carelessly mishandled JPMorgan's residential mortgage-backed securities business. First Am. Compl. ¶¶ 1, 2, ECF No. 122 ("FAC"). Understanding plaintiffs' claims in full at this point requires a brief review of the mortgage industry in which JPMorgan operates.

A. Residential Mortgage–Backed Securities and the 2008 Financial Crisis

Residential mortgage-backed securities or RMBS are bonds backed by payments homeowners make on their mortgage loans. See id. ¶ 10. JPMorgan uses a process known as "securitization" to bundle hundreds of mortgage loans into RMBS, which they then market and sell to investors. Id. JPMorgan groups or tiers their RMBS based on a risk rating. Risky or subprime RMBS form the lower, cheaper tiers, while safer RMBS form the more expensive tiers. Id. ¶¶ 44–45. RMBS are considered subprime or risky when they are backed by mortgagers with impaired credit records, while safer RMBS are backed by more reliable mortgagers. Id. Investors choose a tier in which to invest and then their profits mirror the payments mortgagers make. The values of the RMBS fluctuate depending on whether homeowners pay down their mortgage principal early, refinance their mortgages or default.

After the housing market collapsed in 2008, RMBS investors experienced significant fluctuation in returns on investment because foreclosures increased and home prices and interest rates plummeted. Id. ¶ 10. The downturn exposed flaws in JPMorgan's RMBS protocol and enflamed investors who felt defrauded and misled. Plaintiffs here contend the named directors played a key role in JPMorgan's misconduct in issuing RMBS. Id. ¶¶ 3, 9, 188, 291, 315, 388–89.

B. Criminal Investigation into JPMorgan's RMBS Activity

Investors' fraud allegations prompted the United States Department of Justice ("DOJ") and various federal and state agencies to investigate whether JPMorgan's RMBS practices violated criminal laws. Id. ¶ 17. On November 15, 2013, JPMorgan announced a $4.5 billion settlement with 21 major institutional investors, and four days later announced a $13 billion settlement with the Department of Justice and other government agencies. Id. ¶ 5. Approximately $300 million of the settlement funds were allocated to investors from California. Id. This settlement hinged on JPMorgan's RMBS conduct between 2005 and 2007: JPMorgan admitted it falsely marketed and sold compromised RMBS to investors without warning them the RMBS did not meet the corporation's internal securitization standards. Id. ¶¶ 6, 238, 300, 331. The settlement did not resolve an ongoing criminal investigation against JPMorgan originating in this district, the Eastern District of California. FAC ¶¶ 5, 49, 189, 366.

C. Shareholder Derivative Suits

In this case, three JPMorgan shareholders sue JPMorgan's directors for their alleged involvement in RMBS activity from 2005 to 2007, focusing particularly on this activity's impact in California. Id. at 65–88. This suit is one of many derivative suits attacking JPMorgan's mishandling of RMBS during the financial crisis, which point to the resulting billion dollar settlements as proof of damages. Courts uniformly have dismissed these derivative suits at the outset, at least in part, for not meeting Federal Rule of Civil Procedure 23.1(b)'s pleading requirements.¹

Rule 23.1(b)(3) requires that shareholders bringing derivative suits specifically plead what efforts they undertook to have a corporation's board of directors file the suit on the corporation's behalf; in other words, did shareholders make a pre-suit demand on the board that was rejected? Alternatively, the Rule requires that shareholders plead the specific reasons they have not asked the board to bring their claims; to show why a demand on the board would have been futile. Fed. R. Civ. P. 23.1(b)(3)(A), (B) (providing that the complaint must "(3) state with particularity—(A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and (B) the reasons for not obtaining the action or not making the effort."); Potter v. Hughes , 546 F.3d 1051, 1062 (9th Cir. 2008). A derivative suit cannot proceed without showing either demand refusal or excusal. Fed. R. Civ. P. 23.1(b)(3).

A separate derivative suit brought in the Southern District of New York, and dismissed there, is particularly relevant here. See Steinberg v. Dimon , 2014 WL 3512848 (S.D.N.Y. July 16, 2014). Defendants argue Steinberg 's judgment precludes plaintiffs from re-litigating similar claims and issues here. Mot. at 4–8. In Steinberg , a shareholder derivatively sued fifteen JPMorgan directors in New York for breaching their fiduciary duties, wasting corporate assets, unjustly enriching themselves, and violating section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) ("Securities Act"). See Baskin Decl., Ex. D (Steinberg Compl.), ECF No. 124–4. The New York district court dismissed the complaint for insufficiently pleading demand futility under Rule 23.1. Steinberg , 2014 WL 3512848 at *5.

D. This Case

Plaintiffs contend defendants exposed JPMorgan to financial risk and ruin through the corporation's subprime mortgage business by destabilizing internal standards and controls, fraudulently marketing RMBS, and concealing material information from investors. FAC ¶ 10. Plaintiffs bring three California state claims and one federal claim. They made no pre-suit demand on JPMorgan's board and allege doing so would have been futile. Id. ¶ 296 ("making a demand would be a futile and useless act as the majority of JPMorgan's directors are not able to conduct an independent and objective investigation of the alleged wrongdoing").

Plaintiffs' state law claims allege: (1) Defendants breached their fiduciary duties by putting their own pecuniary interests above the company's; (2) defendants wasted corporate assets by compensating executives and directors for illegal conduct; and (3) defendants unjustly enriched themselves. Id. ¶¶ 357, 370, 373. Plaintiffs' fourth federal claim alleges certain named defendants violated section 14(a) of the Securities Act by issuing false and misleading 2011 and 2012 proxy statements that lured shareholders into blindly reinstating leadership incumbents and approving risky proposals. Id. ¶¶ 377–95. Plaintiffs name defendants Bowles, Burke, Cote, Crown, Dimon, Futter, Jackson, Raymond and Weldon in connection with both proxy statements, defendants Gray and Novak regarding only the 2011 proxy statement, and defendant Bell regarding only the 2012 proxy statement. Id. ¶¶ 378–79.

E. Prior Dismissal and Amended Complaint

The court dismissed plaintiffs' prior complaint in 2014, with leave to amend. See Prior Order; First Consolidated Compl., ECF No. 29; Defs.' First Mot. Dismiss, ECF No. 48. The court found defendants lacked sufficient ties to California to sustain personal jurisdiction as to plaintiffs' state claims and that plaintiffs' federal claim failed under Rule 12(b)(6). Prior Order at 24. After two years of jurisdictional discovery, plaintiffs filed the operative first amended complaint. See Order Granting Discovery, ECF No. 92; FAC (filed April 28, 2016). Although the amended complaint raises the same four claims as stated in the original complaint, it offers more detail about JPMorgan's California-specific RMBS business, FAC at 65–88, bolsters plaintiffs' theories and explanation as to why JPMorgan's proxy statements were misleading, and changes the relief sought under its federal claim, compare Compl. ¶¶ 304–08, with FAC ¶¶ 377–95. Defendants now revive their initial jurisdictional arguments in seeking to dismiss the amended complaint. Plaintiffs oppose, Opp'n, ECF No. 132, and defendants reply, ECF No. 133.

II. ORDER OF ANALYSIS

Defendants raise multiple jurisdictional inquiries and so the court must first consider the proper order of analysis. Potter , 546 F.3d at 1055 ; see also Ruhrgas AG v. Marathon Oil Co. , 526 U.S. 574, 584, 119 S.Ct. 1563, 143 L.Ed.2d 760 (1999) (explaining although "subject-matter jurisdiction necessarily precedes a ruling on the merits, the same principle does not dictate a sequencing of jurisdictional issues") (citation omitted). A federal court must independently ensure it has subject matter jurisdiction over every claim and...