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 or participating the $225 million loan it made to Cablevisión, owned in the majority by Grupo Televisa, one of Mexico's largest telecommunications companies.
Cablevisión used the loan to purchase a 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 Cablevisión, and its majority shareholder Televisa, had no intention of allowing it's biggest competitor to control 90% of loan.
Cablevisión 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 Cablevisión'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 Cablevisión'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 Cablevisión." (author's emphasis) (Image)
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 below distills the judge's order with analysis.
Morgan made a loan to Cablevisión 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 Cablevisión-Morgan loan agreement requires prior approval by Cablevisión for any assignment of the loan and restrictive criteria to protect Cablevisión in the case of participation agreements. Participation didn't require prior approval, however, the agreement provided recourse for Cablevisión should they threaten the company business.
"Junior" employee's approval enough for Morgan
Morgan claims that its representative telephoned Guadalupe Phillips Margain, Televisa’s (Cablevisión'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 Cablevisión loan. The second was a request for a credit report on Cablevisión 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 Cablevisión 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 Cablevisión. 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 Cablevisión.
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 Cablevisión might object to such an assignment. “ Judge Rakoff
Morgan was doing a deal behind Cablevisión'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, Cablevisión, 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% of the loan.” The deal was done, for all practical purposes.
And Morgan didn't even bother to tell Cablevisión or Televisa that it had sold the loan:
“On May 21, 2009, Cablevisión 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 Cablevisión’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 Cablevisión deal at rates equally favorable to Morgan. This was happening while, unbeknownst to Televisa and Cablevisión, Morgan was structuring what the judge described as a special deal for Cablevisión's competitor that allowed remarkable access to early all of it's 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 Cablevisión.”
Why did Morgan turn down a sure deal on favorable terms from Cablevisión's majority owner Televisa?
Why was Morgan negotiating with Cablevisión's arch competitor to do a deal that would actually harm the holder of it's loan, Cablevisión?
Did Morgan anticipate a scenario where the loan holder, Banko Inbursa, demanded and received the details of Cablevisión's business and handed them over to Telemex?
And how long would it take Telemex to drive Cablevisión 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.
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