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.
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.
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
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
Some justice for
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.
This article may be reproduced in whole or in part with attribution of
authorship and a link to this article.