How JP Morgan treats its clients: scandalously and in bad faith

By Felix Salmon
February 18, 2010

Judge Jed Rakoff’s January 29 ruling in the case of Empresas Cablevisión vs JP Morgan Chase Bank has barely been reported, which is a shame, because it sheds some much-needed light on how banks like JP Morgan really operate — and, for that matter, on the kinds of methods by which Carlos Slim has made his multi-billion-dollar fortune.

I’ve put a copy of the ruling here — it was faxed to me from Mexico, so apologies that it’s a large, non-machine-readable file. (Update: Reader Guanix has put a clean version here, I’ve also uploaded it here.) But the gist is that JP Morgan took one of its longest-standing clients in Mexico — Grupo Televisa — and tried to hand all of its secrets over to its biggest rival, Carlos Slim. And the way it tried to do that was by selling Slim a loan larded up with covenants which would essentially force Televisa to reveal any and all information to the holder of the debt.

I was faxed the ruling in the case by Alfonso de Angoitia, a director and very senior executive within Grupo Televisa, who told me the story behind the lawsuit. I also called JP Morgan for comment, but they said nothing. And it wasn’t one of those 45-minute off-the-record phone conversations where they ultimately say that they decline to comment on the record: this was more like a 10-second conversation where no sooner did I make it clear which case I was calling about than they said “no comment” and the phone call was over. So for JP Morgan’s side of the story, all I have to go on is their 40-page memorandum of law in the case, which is quite narrowly legalistic, which was roundly rejected by Rakoff, and which obviously can’t respond to Rakoff’s ruling since it was filed before Rakoff made his ruling.

In any case, the facts of the case are pretty clear. The relationship between JP Morgan and Televisa goes back decades, and so JP Morgan was the natural choice for Televisa to turn to when it decided to buy a fiber-optic cable company called Bestel for $325 million, $225 million of which was to come from Televisa subsidiary Cablevisión.

JP Morgan intended to syndicate the loan, but the timing was bad: the deal closed in 2008, when credit markets were all but closed, and as a result JP Morgan ended up owning all of it. After an attempt by Televisa to help JP Morgan syndicate the loan fell through, JP Morgan then turned to Inbursa, Carlos Slim’s bank.

This was not an obvious choice from the point of view of serving one’s client. Slim and Cablevisión compete fiercely in the telecommunications space, where Slim is the dominant monopolist and Cablevisión is selling telephony and internet access in competition with him. And the rivalry is all the tougher due to the history between the two groups: Slim used to be a major shareholder in Televisa, and to this day Inbursa owns a 22% stake in Cablevisión.

Now there were two ways of selling this loan: JP Morgan could either assign it to Inbursa, which would require Cablevisión’s permission, or else it could participate it to Inbursa, which would not. At first, JPM tried to assign the loan, but unsurprisingly Cablevisión refused to grant their permission for that deal to happen. It’s worth quoting Judge Rakoff’s ruling here:

On June 3, [Guadalupe] Phillips [of Televisa] called Carlos Ruiz de Gamboa of JP Morgan to report that Cablevisión would not consent to the proposed assignment. Gamboa allegedly reacted by threatening to give Inbursa the 90% interest in the form of a “participation.” Later that day, Phillips sent JP Morgan an email with an attached letter from counsel formalizing Cablevisión’s decision. That letter expressed Cablevisión’s belief “that it would be inappropriate, and could cause serious harm to our business and our competitive position, if one of our major competitors is allowed to gain access to confidential and competitively sensitive information about us, or to exert any control over our business affairs and hinder the development of our business.” The letter also noted that a “participation” of 90% of the loan to Inbursa would be similarly unacceptable and would violate JP Morgan’s “duty of good faith” under the Credit Agreement. Nonetheless, JP Morgan began negotiations to transfer 90% of the loan to Inbursa in the form of a Participation, and these discussions continued throughout June and July until a formal agreement between Inbursa and JP Morgan was executed on July 15, 2009.

This is all pretty amazing stuff. Televisa is a client in long standing of JP Morgan, and makes its views on JP Morgan selling the loan to its most formidable competitor very clearly known. What’s more, Televisa even offered to buy back the loan from JP Morgan at exactly the same discount as Inbursa was offering, and JP Morgan’s Sjoerd Leenart gave Televisa every indication that the loan would not be participated to Inbursa. Even as JP Morgan was doing exactly that.

For a bank which claims to pride itself first and foremost on its client focus, this is seriously torrid. It’s pretty clear why Inbursa wanted the debt — we’ll come to that in a minute. But why was JP Morgan so desperate to alienate Televisa by selling it to Inbursa? Is Carlos Slim so scary that if he wants 90% of a $225 million loan, JP Morgan will give up an entire client relationship to sell that to him? Why else would JP Morgan go ahead with a course of action which looks for all the world as though it was designed to anger Televisa as much as possible?

It turns out — that is, it was revealed to Televisa after it finally brought suit against JP Morgan — that this was no ordinary participation agreement, either. It had all manner of extra bells and whistles in it, all of which were designed to (a) make it look very much like an assignment rather than a participation; and (b) extract information from Cablevisión and hand it over to Inbursa. As Rakoff says, “the agreement permits Inbursa to request and receive nearly unlimited information from Cablevisión”. And what’s more, if Cablevisión for any reason refuses to hand over such information, Inbursa can declare Cablevisión in default, and automatically convert the participation to a fully-fledged assignment.

Rakoff concludes:

JP Morgan, acting in bad faith, used the guise of a purported “participation” to effectuate what is in substance a forbidden assignment, with unusual provisions demanded by Inbursa that are calculated to give Inbursa exactly what the assignment veto in the Credit Agreement was designed to prevent. JP Morgan thereby violated, at a minimum, the covenant of good faith and fair dealing automatically implied by law in the Credit Agreement…

The Court concludes that plaintiff has shown a likelihood of success on the merits of its claim that JP Morgan breached its implied covenant of good faith and fair dealing under the Credit Agreement. Further the Court finds that Cablevisión has shown a likelihood of irreparable harm if preliminary injunctive relief is not granted…

there is as a factual matter a strong likelihood of irreparable harm arising from Inbursa’s ability to seek and obtain Cablevisión’s confidential business information under the Credit Agreement and then use it to Cablevisión’s detriment.

With that, Rakoff tells JP Morgan that it cannot proceed with the participation, or in any way treat it as valid or enforceable, or in any other way try to give ownership of the loan to Inbursa.

The ball is now in JP Morgan’s court to work out how to comply with Rakoff’s injunction — one way would be to go back to Televisa, say sorry, and offer to sell them the loan instead, at the same price. But they haven’t done that: according to Angoitia, they haven’t been in touch with anybody at Televisa at all. All they’ve visibly done since the ruling came down was go once to the court to ask for a two-week extension, which was granted.

I think at this point that a public apology from JP Morgan to Televisa is the bare minimum that is in order — along with an explanation of what exactly went wrong, and how it was that the bank ended up acting in such spectacularly bad faith. Or maybe they genuinely think that they didn’t do anything wrong. Nobody knows: JPM has gone silent. Which I don’t think is necessarily the best way of redeeming its reputation in this case.


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My grandfather always had a saying; “He’s far too wealthy to be an honest man” And I would assume as much with Carlos. Nice investigative reporting, I wonder if JPM has ever sold out other clients to competitors through a similar scheme, The idea, (and I’ll give them creativity points for it) had to come from somewhere .. either JPM or Carlos.

Posted by wolphkaat | Report as abusive

Felix, I’m sure that you already know, but it is worth emphasising that this is (only) a preliminary injunction. The full suit, if it goes ahead, is yet to come.

I am not even close to being a lawyer, but presumably JP Morgan’s legal team is now discussing the likelihood of their winning if it does go to trial. There would appear to be a variety of options open to JPM at this stage, and the possibility of negative press will be only one of their concerns.

Posted by JohnBarrdear | Report as abusive

I’ve put a cleaner version of the ruling on Scribd, where you can also download a PDF: Temp-pl

Posted by guanix | Report as abusive

Guanix, thankyou, you’re a star.

Posted by FelixSalmon | Report as abusive

Thank you for posting this.

Very educational. Entertaining, too — I found myself guffawing at JPM’s biblical-scale impudence.

Posted by Mega | Report as abusive

Did JPM stand to make money from the proposed deal further down the road? Or is this a case of the bank being vindictive toward a client who told them no, like the one you wrote about a while ago who almost lost her house to a bank that didn’t exist anymore?

Posted by drewbie | Report as abusive

1. JPM was not desperate to alienate Televisa, nor were they scared of Slim. They were hoping to “trade up” from their relationship with Televisa to a new relationship with Slim, who clearly throws off more banking business than Televisa.

2. Doesn’t Slim already have access to many of Cablevision’s secrets through his equity ownership? He may not get as much info as he would get through these ridiculous covenants, but I would think Televisa would have a hard time arguing that some things were trade secrets if Slim already had access to that info as an equityholder (albeit in the subsidiary, but the subsidiary that actually competes with Slim’s company).

Posted by Snyderico | Report as abusive

Something else to consider. JP Morgan as a company is considered a citizen of the United States. Because of this they can lobby congress. Considering how this “person” behaves when left to their own devices, is it wise to allow JP and entities of similar ilk the right to have a voice in the hall of congress?

Corporations must not be allowed to continue as citizens. And this type of behavior is exactly why. All they do is cover it up at little better when they do it state side. Even now corporate interests sell off the rights and protections of the citizenry. This is something that needs serious consideration.

Posted by Benny_Acosta | Report as abusive

Absolutely right about trading up clients. This is the whole reason we have seen such bad negotiating on the part of regulators and their advisors.

Why would Dan Jester and Ken Wilson sell out the US taxpayer to help Goldman? Besides being unpatriotic, why mar your reputations like that? Well, if most of your future earnings will rely on your Goldman relationships, it is hard to rationalize taking a hard line against them.

This kind of conduct is endemic to Wall St. It is why bank boards get horrible advice from pay consultants and executive comp lawyers. Giving away the keys to the candy store is their job so they get picked for the next assignment. Fiduciary duty to shareholders? Duty of loyalty? Hah! Quaint little concepts better left to law school exams. The show must go on!

Posted by Sad_Oligarch | Report as abusive

Thanks, Felix ! Keep it up ! God bless ya. Also regarding the comment above by Benny Acosta, it turns out that the alleged determination that corporations are people with the same rights as natural persons, was bogus anyhow. The clerk of the supreme court at the time was apparently an ex-employee of the railroads and apparently deliberately misstated the decision of the court on the header notes in favor of the railroad, indicating that the court had decided that the railroad in question was a “person” when apparently in fact the court had not decided that at all. All one has to do is read the whole decision to see that. But over the years, based on a cursory review of the header summary of the decision, corporations have been deemed “people” (actually apparently only for-profit corporations at that -not non profits, i.e.unions)so there is case law. But the supreme court overthrew the older civilwar era case that had slaves as property which had become case law too, and held that slaves really had civil rights. So the court could overthrow this monstrosity too. But they’ll have to be made to overturn it, or constitution will have to be amended to specifically exclude anything but a natural person from having any first amendment rights. Among other things for profit corporations can lie just like people, but of course, they’re always above reproach..right ? I think that congress needs to get this constitutional amendment going ASAP. We the people would go for it in a heartbeat.The corporations have to be put in their place. This can be done, folks.

Posted by gramps | Report as abusive

Agreed Oligarch. That’s why when you look at the covenants in a loan/bond issued by a corporate issuer, the terms are much different than for a private equity sponsor (at least this was the case when I last worked on these deals a few years ago, and I have no reason to believe it has changed much). The sponsor represents repeat business for the bank and the bank is therefore more willing to give away the store when it comes to the restrictiveness of the covenant package. Even if there is no difference in the ability of the corporate issuer or the sponsor to repay the loan. No bank wants to risk losing all of KKR’s business by negotiating hard on the covenants, especially when the bank will just end up dumping the crap on unwitting investors who just buy whatever is being sold in order to spread their risk from any one debt purchase.

Posted by Snyderico | Report as abusive

Is this the same Carlos Slim that bought a % of the New York Times? how is that deal?

Posted by justinb | Report as abusive

Morgan Stanley was the same company that scandalously ripped off of bunch of ‘mom and pop’ investors in Singapore back in 2007 with Pinnacle Notes. Utterly contemptible, and yet, as far as I know they got away with it without even a slap on the hand.

It makes me mad every time I think about it. They advertised it with a picture of a little kid hugging a teddy bear. If you read the advertisement, the only risk is that one of “three gold-plated sovereigns, a massive telco or one of the world’s largest sovereign wealth funds” would go bankrupt – ie, very low risk indeed. But buried in the fine print is the information that you also lose all of your money if one of the lowest tranches of a CDO goes belly up that insures THESE clients:

“MBIA. RBS. Barclays. Freddie Mac. Fannie Mae. Kaupthing. AIG. Bear Stearns. Landsbanki. HBOS. Lehman Brothers. Wachovia. XL Capital. The Republic of Iceland.”

The worst of the worst.

Here’s the links if anyone else wants to get outraged too: 17/18324/from-pinnacle-to-nadir/ tml

Posted by dlr | Report as abusive

I guess Morgan Stanley and JPMorgan are different companies, so sorry, last post was off-topic. This post too.

I noticed re-reading the alphaville article about the Morgan Stanley Pinnacle Notes scam that the h/t went to ‘Felix Salmon’. How about a retrospective expose Felix? There was a second set of notes from Morgan Stanley that went bust too, recently, with an even cuter set of kids of the prospectus, wasn’t there? I remember reading a blog about it, but I couldn’t find the link.

If you ask me what Morgan Stanley did was far worse than the stuff that Goldman Sach’s has been being raked over the coals for, and yet for some incomprehensible reason they don’t seem to have received any negative publicity about the matter at all.

Posted by dlr | Report as abusive

Re JPM whatever became of the investigation into the Bear Stearns takeover?

I’ve thought for a long time that the collapse and ‘rescue’ of Bear Stearns and WaMu pay have had more to do with rescuing JPM…..

Posted by ChrisJCook | Report as abusive

This is the exact same Carlos Slim who invested $250 million in the NY Times in either 2008 or 2009. Funny thing, the great NY Times (which prints “all the news it deems fir to print”, shows ZIPPO about this ruling and this case on its own website. To my mind, that is a bigger scandal than the case itself (albeit not surprising, frankly).

Posted by Rudovsky | Report as abusive

The phrase “criminal enterprise” comes to mind. The blatant willingness to ignore fiduciary and contractual duty is, to me, not just contemptible, but criminal in the very legal sense of the word. Ah, but special rules for the TARP hand-maidens. And some in the banking world still cannot understand why many now refer to them as “banksters?”

Posted by manbelbrot | Report as abusive

Nice find, Felix. As I blogged this morning ( ), JP Morgan’s silence on the facts is telling. It’s not as if they had no opportunity to respond:

“Since JPMorgan moved for summary judgment pursuant to Fed. R. Civ. P. 56, they, like Televisa, were entitled to submit affidavits in support of their position, and it appears they submitted declarations from “Sheldon L. Pollock” and “Jaquelina Truzzell.” Both declarations have been unsealed by Judge Rakoff’s order, but neither is on the docket.

I doubt the declarations say much; JPMorgan’s memorandum of law primarily references the Pollock and Truzzell declarations when discussing side matters, like telephone calls and Televisa’s motives for opposing the assignment / participation. Truzzell apparently affirms there are “no side agreements” with Inbursa and that JPMorgan would not release “confidential” information, but that’s it. There’s nothing about how JPMorgan came to participation terms with Inbursa that, at least on their face, entitle Inbursa to a treasure trove of information about Televisa, far more than provided by JPMorgan’s standard participation agreement.

Which I find telling. Though the standard response of most defendants is — for tactical reasons like avoiding getting pinned down to a particular version of events — to “deny and delay” rather than to come forth with an affirmative opposition, under the facts here, JPMorgan really needed to make a better showing. …

Such silence could be, in part, an attempt by JPMorgan to protect Inbursa’s confidences, which arguably would have been appropriate. (I say “arguably” because the totality of the circumstances here — primarily Inbursa’s attempt to negotiate terms more favorable than those typically provided by a participation agreement — imply that Inbursa has waived its right to keep those discussions confidential from Televisa.) But there’s nothing on the docket reflecting an attempt to have Judge Rakoff review any pertinent materials in camera, and so there’s no reason for us to speculate that JPMorgan’s silence was a product of confidentiality.”

Posted by MaxKennerly | Report as abusive

After reading the materials it is not as clear cut as you say.

Apart from the first call to Philips, JPM’s dialogue with Televisa seems to be well documented and it is not at all clear that Televisa was in a panic about confidential information. They were clearly aware of the dialogue with Inbursa and curiously seem to have been negotiating directly with Inbursa themselves. And Salvi Foch also thought the loan was an attractive buy.

Interestingly no one, including you, has commented on the 22% stake in Cablevision that Inbursa holds. First, what information and board representation do they already get because of that? Second if the deeply discounted loan was attractive to Televisa as majority owner, why would it not be to Inbursa? Apart from their own ownership stake, Inbursa would have benefited from the implicit support of Televisa (Televisa probably has cross defaults and accelerations in it loan and bond agreements tied to its subs).

Inbursa is well known for making large, aggressive credit plays in situations where it can arbitrage the international bank practices vs its own strong credit views and more flexible credit allocation practice. In this case they could get a local big name credit cheap because capital restrictions made foreign banks less able to invest in asset plays rather than relationship lending. Also many banks cant hold that kind of large bilateral term loan; their internal rules require syndication. So JPM probably had to firesale the loan and Inbursa saw a deal yielding much more than other Cablebision and Televisa debt.

Separately, amending a standard participation agreement is not prima facie grounds for assuming skulduggery. Most large financial outfits have standard templates for contracts which then get negotiated; some things cannot be changed and others can. No surprise Inbursa wanted to get as many lender rights as it could, and that JPM stuck on the items which would break the loan agreement.

Hard to be sure until both sides get to argue fully in court but there is at least a case here that Televisa reacted only when it lost out to Inbursa, or when someone very senior above Foch learnt about this and had a cow about the Slim link. Either way it would seem that you have taken the easy approach of taking the fashionable bank attack route rather than dig a bit and look at the possibility that there is a more cpmplex but equally juicy story which might still trip up some people at JPM but also at Televisa.

P.S. Your dismissal of the JPM document as “narrowly legalistic” is hyperbole. What else would it be? JPM is making a legal case, not writing an article. And it is pretty standard for this type of submission just as Rakoff’s admittedly racy ruling is standard. There is a lot of information that you simply ignore which is pretty sloppy because it raises lots of unanswered questions which would have made your article more interesting.

Posted by larch | Report as abusive

One further point. Not much attention has been paid to what confidential information, if any, was available to JPM and Inbursa. Televisa itself has told Inbursa directly that there was no private information supplied to banks – not unusual for strong companies – and on that basis JPM would have had a tough time asking for anything extra (“reasonable’ request would not go beyond company practice unless there was a real credit problem).

That is not to say that the whole idea of Inbursa being a lender isn’t a cause Televisa to stop and wonder but it is hardly the immediate catastrophe Televisa suggests.

Posted by larch | Report as abusive

Let me tell you what Morgan Stanley did to me. I put $1,000.00 in a Roth IRA about 10 years ago with them. The market has flexed as everyone is aware, but now MSSB has installed a minimum balance fee, before I noticed it and transferred the account (for which they have a %95.00 closing fee) they had debited the account for all she was worth. I will never EVER use Morgan Stanley Smith Barney for the rest of my days. What they have done is essentially legalized stealing. I wish others with the same issues would come together with me in a class action against them. Robert – Long Beach, MS

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