Federal district court Judge Jed S. Rakoff called off a J.P. Morgan deal in an order that revealed the inside track on how the financial giant does business. The ruling of January 28 prevents Morgan from selling a participation in the $225 million loan it made to Cablevisi�n, owned in the majority by Grupo Televisa, one of Mexico�s largest telecommunications companies.

Cablevisi�n used the loan to purchase Empresas Bastel which operated a major fiber optic network throughout Mexico. While it was no secret that Morgan would sell the loan to other investors, Judge Rakoff found that Cablevisi�n, and its majority shareholder Televisa, had no intention of allowing its biggest competitor to control 90 percent of loan.

Cablevisi�n sued Morgan after it discovered that the firm had crafted a loan sales agreement that allowed the Morgan-selected investor, Banco Inbursa, S.A. (Inbursa), to gain virtually all of Cablevisi�n�s business secrets in return for purchasing the loan. Banco Inbursa is owned by Carlos Slim, the Mexican investor who also owns Telemex, Mexico�s largest telephone, fiber optic, and internet provider. The Slim companies are Cablevisi�n�s largest competitor for the very business the Morgan loan was used to purchase, a Mexican business and consumer fiber optic network.

According to Judge Rakoff, by its actions �JP Morgan thereby violated, at a minimum, the covenant of good faith and fair dealing� by attempting to turn participation into what was really a disguised assignment of the loan that would cause irreparable harm to Cablevisi�n.� [Author�s emphasis]

Felix Salmon provided an excellent analysis on what this deal and decision says about How JP Morgan treats its clients: scandalously and in bad faith. In addition to what it means to cause irreparable harm to a decades long client, the opinion and order by Judge Rakoff also reveals a chilling narrative on Morgan�s crude and deceptive tactics in this deal.

The narrative that follows distills the judge�s order with analysis.

Morgan made a loan to Cablevisi�n to purchase a majority of Bastel�s fiber optic company, the third largest in Mexico. The $225 million loan was completed just as the financial meltdown began in 2008 making syndication problematic. The Cablevisi�n-Morgan loan agreement requires prior approval by Cablevisi�n for any assignment of the loan and restrictive criteria to protect Cablevisi�n in the case of participation agreements. Participation didn�t require prior approval, however, the agreement provided recourse for Cablevisi�n should they threaten the company business.

�Junior� employee�s approval enough for Morgan

Morgan claims that its representative telephoned Guadalupe Phillips Margain, Televisa�s (Cablevisi�n�s majority owner) director of risk and finance, and got verbal approval for assignment of the loan to Imbursa in March or early April 2009. Televisa�s Phillips denied any such conversation or approval. There is no record of this approval other than Morgan�s claim that the approval took place as described.

Then Morgan sent two emails to a junior level employee at Televisa in early May 2009. The first was a prospectus on the Inbursa participation in the Cablevisi�n loan. The second was a request for a credit report on Cablevisi�n which was to be shared with Inbursa. Here�s how Morgan described this in their memorandum of law filed with Judge Rakoff: � . . . a representative of JPMorgan asked Televisa on May 8, 2009, for permission to obtain a credit report regarding Cablevisi�n which could be shared with Inbursa. That request was granted and a written permission was issued.� JPMorgan

This is the entire basis of Morgan�s claim that they got prior approval to market the loan to a bank owned Carlos Slim who also owned their arch rival in the telecommunications market, Telemex. Morgan couldn�t even identify the date of the phone call to Phillips, the senior executive at Televisa. They were precise and in possession of a paper record of their communication with a mid level employee, not a part of the deal. This employee is referred to in the Morgan memorandum of law as �Televisa,� majority owner of Cablevisi�n. It didn�t matter to Morgan that the employee was not an officer of the corporation and had no authority to approve the agreement. That employee became �Televisa.�

The two emails were just a crude gotcha trick. By Morgan�s logic, emailing the prospectus initially established that the employee contacted was considering the deal. The second email, by Morgan�s logic, indicated that the junior employee was authorizing the deal for Televisa by issuing written permission for a credit report.

This is the absurd basis that Morgan used to defend their deal. We�re expected to believe that a senior executive would give a verbal approval for a deal that would require the surrender of almost all the business secrets of a major subsidiary of that firm. Then we�re expected to believe that Morgan actually thought that a junior level employee could approve the deal for Televisa by receiving one email then sending another authorizing a credit report. This had to be pure desperation on Morgan�s part after the deal was challenged. It is barely conceivable that they thought this employee could speak for Televisa or Cablevisi�n.

The judge�s order indicated that: � . . . internal JPMorgan e-mails indicate that JPMorgan not only began marketing the loan to Inbursa during this time (March 2009), but also recognized that Cablevisi�n might object to such an assignment. � Judge Rakoff

Morgan was doing a deal behind Cablevisi�n�s back that it knew the company objected to at least, and that it should have known would harm the company. This is the very same company, Cablevisi�n, that had given Morgan the opportunity to handle the original financing, a company owned in the majority by Televisa, which had done business with Morgan for decades.

Double dealing

Then, it turns out, �On May 8, 2009, JPMorgan and Inbursa reached a handshake agreement on the basic terms of an assignment of 90 percent of the loan.� The deal was done, for all practical purposes.

And Morgan didn�t even bother to tell Cablevisi�n or Televisa that it had sold the loan: �On May 21, 2009, Cablevisi�n learned from HSBC, which had previously expressed interest in purchasing some of the loan, that the loan was no longer for sale. Televisa�s Phillips immediately contacted Sotelo at JPMorgan, who denied that any sale had been effected. Later that day, JPMorgan�s Lautersztain sent Phillips and others at Televisa a formal request for Cablevisi�n�s consent to the assignment.� Judge Rakoff

So in the same day, Televisa was told that there was no deal and then was asked permission to approve a deal that was already done. Amazing!

Judge Rakoff described how Televisa itself offered to finance the Cablevisi�n deal at rates equally favorable to Morgan. This was happening while, unbeknownst to Televisa and Cablevisi�n, Morgan was structuring what the judge described as a special deal for Cablevisi�n�s competitor that allowed remarkable access to early all of its proprietary business information and trade secrets.

Judge Rakoff noted that the Morgan �Participation Agreement was executed on July 15, JPMorgan did not disclose the participation to Cablevisi�n.�

Why did Morgan turn down a sure deal on favorable terms from Cablevisi�n�s majority owner Televisa?

Why was Morgan negotiating with Cablevisi�n�s arch competitor to do a deal that would actually harm the holder of its loan, Cablevisi�n?

Did Morgan anticipate a scenario where the loan holder, Banko Inbursa, demanded and received the details of Cablevisi�n�s business and handed them over to Telemex?

And how long would it take Telemex to drive Cablevisi�n into the ground once it got just about every detail avalable on it�s business, strategies, and trade secrets?

Some justice for a change

Judge Rakoff concluded, �The fact that these and other provisions were demanded by Inbursa and were not part of JPMorgan�s standard participation agreement is further confirmation that this is really a disguised assignment.� He then enjoined any further action on the loan by Morgan and told the lawyers from both sides that he�d see them in court soon to complete this matter.

We have entered a period of grotesque decadence in the financial and business dealings of those who brought us the great financial calamities. It�s time to begrudge the culprits their ill gotten gains and turn the tables before it�s too late, if it isn�t already.