JPMorgan Investors Can't Bring Suit Over Madoff Scheme

Stay current on changes and developments in corporate law with a wide variety of resources and tools.

By Michael Greene

Jan. 6 — A federal appeals court Jan. 6 refused to revive a shareholder derivative lawsuit alleging that JPMorgan Chase & Co. turned a blind eye to Bernard Madoff's Ponzi scheme.

In a non-precedential summary order, the U.S. Court of Appeals for the Second Circuit said the lawsuit filed against JPMorgan Chief Executive Officer James Dimon and other directors was correctly dismissed by a lower court for failure of the shareholder-plaintiffs to show that they were excused from making a pre-suit demand on the company's board.

Difficult Theory

The plaintiffs alleged that JPMorgan, which served as the primary banker for Bernard L. Madoff Investment Securities LLC, ignored red flags of misconduct. Accordingly, the investors claimed that JPMorgan board members breached their fiduciary duties by failing to properly oversee the company's operations.

However, the U.S. District Court for the Southern District of New York in a 2014 decision found that the investors failed to show that a majority of the board faced a substantial likelihood of liability under a “failure to monitor” theory, which would have made a pre-suit demand futile.

Applying Delaware law, district court judge Paul Crotty reasoned that the investors couldn't prevail under a failure to monitor theory as outlined in the Delaware Chancery Court's 1996 landmark decision—In re Caremark International Inc. Derivative Litigation, 698 A.2d 959-because they only claimed that JPMorgan's controls were inadequate, not that they didn't exist.

Delaware law applied in this case because JPMorgan is a Delaware corporation.

In affirming, the Second Circuit concluded that the lower court hadn't misapplied Delaware law.

“[W]e conclude that plaintiffs cannot prevail on their Caremark claim—a claim that the Delaware Supreme Court has described as ‘possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,'” and that the district court properly dismissed the complaint, the appeals court said.

To contact the reporter on this story: Michael Greene in Washington at

To contact the editor responsible for this story: Yin Wilczek at

Request Corporate on Bloomberg Law