Espinoza v. Dimon

JPMorgan’s Chief Investment Office (CIO) traditionally invested in conservative, low-risk securities. JPMorgan’s Chief Executive Officer, Jamie Dimon (defendant), directed the CIO to make more aggressive, riskier investments. London-based traders within the CIO, who later became known as “the London Whale,” unsuccessfully bet on risky credit derivatives, resulting in losses of billions of dollars. Dimon and JPMorgan’s Chief Financial Officer, Douglas Braunstein (defendant), initially tried to conceal its losses and told investors that the investments were safe but eventually disclosed the extent of the risks taken. Dimon admitted that JPMorgan failed to monitor the CIO’s risky trades properly. Ernesto Espinoza (plaintiff), a shareholder of JPMorgan, demanded that JPMorgan’s board of directors (the board) (defendants) investigate and sue the people responsible for the risky trades. After a thorough investigation, which consisted of employee interviews, a voluminous document review, and meetings with regulators, the board decided not to pursue litigation against those responsible for the risky trades and instead implemented remedial measures to prevent reoccurrence of the misconduct. The remedial measures included changing CIO’s leadership, better oversight and risk controls, reducing management’s salary and returning bonuses, and staffing changes. The board reasoned that suing those responsible for the losses was not worthwhile based on the cost and burdens of litigation and the low likelihood of success. Espinoza filed suit against the board, claiming that the board wrongfully refused the demand for litigation. The district court dismissed the suit for failure to state a claim and denied Espinoza’s request for leave to amend the complaint. Espinoza appealed.