JP Morgan Chase was willing to settle with Enron’s investors over its alleged complicity in the energy company’s financial scandal, but not with its own investors. That turned out to be a prudent decision when the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of the JP Morgan Chase investors’ securities class action last week.
In ECA v. JP Morgan Chase Co., 2009 WL 129911 (2d Cir. Jan. 21, 2009), the court found that the plaintiffs’ scienter allegations suffered “from a basic problem concerning plausibility.” The plaintiffs argued that JP Morgan “concealed its transactions with Enron in return for excessive fees.” The court held, however, that it was “implausible to have both an intent to earn excessive fees for the corporation and also an intent to defraud Plaintiffs by losing vast sums of money [through loans to Enron that JP Morgan could not recover].”
Holding: Dismissal affirmed (on both scienter and materiality grounds).
Addition: The court considered whether Chase was motivated to artificially inflate its stock price via the Enron fraud so that it could use the stock as currency for its acquisition of JP Morgan. Whether this type of motive allegation can contribute to a strong inference of scienter has been an unsettled question. The court found that “a generalized desire to achieve a lucrative acquisition proposal” is common to all companies seeking to make an acquisition and fails “to establish the requisite scienter.”