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.
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.