Note to readers: The Australian dollar has been at or above parity with the US dollar for several months. All dollar amounts reported in this story are in Australian dollars unless indicated otherwise.
JP Morgan was thrown out of the Australian courts on Monday afternoon in a precedent-setting case, which has rejected the basis on which the global investment bank charges mining companies for advisory fees and bonuses in mergers, acquisitions, and shareholding contests.
In Sydney, the Court of Appeal of New South Wales has ruled to dismiss an appeal by the bank against last year’s judgement by the Supreme Court of New South Wales. Lawyers believe that no appeal to the Australian High Court is possible on constitutional grounds. JP Morgan’s Sydney branch is now left with a bill owing to its client, Consolidated Minerals (Consmin), the manganese mining specialist owned by Ukrainian metals magnate Gennady Bogolyubov.
Allowed to stand on all counts by the appellate court is a categorical rejection of the way JP Morgan charges its clients by Sydney judge, David Hammerschlag (“Hammer Blow”). Rejecting JP Morgan’s demand to be paid A$50.8 million for advising Consmin during hotly contested takeover bidding for Consmis during 2006 and 2007, the judge ruled in March of 2010 that JP Morgan (JPM) had been “capricious, unreasonable and unjust”.
Hammerschlag’s calculation in his ruling was that JPM was entitled to a total fee of $19,250,680.08, comprising a combination of “base defence response” and “incentive” fees, engagement bonus, monthly retainers for services, and costs. Among the costs JP Morgan’s Sydney executives had demanded reimbursement of a Big Mac, eaten at an airport between Sydney and London, and invoiced at $6.32.
During the past four years of advice and litigation, JPM and Consmin have agreed that between October 2006 and January 2008, the market capitalisation of the mining company jumped by $805 million – from a starting point of $495 million to a closing point of $1.3 billion. But the dispute between them, which the courts in Sydney have now settled, is when exactly the bidding process started; and when JPM started earning the fees it has been claiming. At stake is one of the largest manganese mining operations in the world with almost 18 million tonnes of estimated reserves and resources of manganese, a hardening alloy required by steelmakers.
In the first court judgement, Justice Hammerschlag ruled that Consmin’s obligation to JPM had been covered when Consmin sent a $20 million payment by cheque on February 6, 2008 which JPM banked immediately.
In its argument on appeal last December, JPM claimed the trial judge had made counting and reasoning mistakes, and that JPM should be “rewarded for obtaining ‘additional value’ for the shareholders by reference to the additional value actually achieved.” The appeals court judgement, just issued, dismisses every point in JPM’s justification of its services and fee calculation.
Now that JPM’s appeal has been rejected, the global mining community is bound to take copies of the Hammerschlag ruling and the appeals court judgement for detailed analysis of all JPM’s invoices.
Ahead of the Sydney trial, JPM’s Sydney Managing Director John Gidney was asked to clarify why his bank believes it is proper to claim duplicate or triplicate fees for the same set of services rendered. Gidney was also asked to explain how JPM justifies charging for services that appear to have ended in failure, and for Bogolyubov’s success in the Consmin takeover, which was guided by a rival bank at a significantly lower charge. Gidney declined to respond, adding: “I don’t think there is any purpose in having this discussion.”
Gidney was also questioned in court during the trial before Hammerschlag. The transcript of what he said appears in the submissions to the appeals court. Gidney admitted being worried that JPM’s fee demand might not be paid by Consmin. He was then asked if his concern was “whether or not JP Morgan had really earned the fee as opposed to there being a spike in the manganese price which had driven the share price up?” Gidney replied: “Yes.” “And you were worried, were you not, that JP Morgan might never get paid unless it sued?” “Yes”.
Following yesterday’s judgement, Bogolyubov said: “I have always considered the [$20 million] payment to JP Morgan fair, and more than enough to cover the services provided by them. I am very pleased that the courts have supported my view.”
Oleg Sheiko, Bogolyubov’s advisor, said: “I am sorry that JP Morgan in Sydney did not agree to the proposal for settling our differences, and starting afresh on the same basis as we work with JP Morgan in Europe. From the very beginning, however, the Sydney bankers rejected the proposal. Now it seems they owe us money. The Sydney bankers should understand the old Russian maxim – zhadnost porozdaet bednost [greed begets poverty].”
The timing of the Australian rulings could not be worse for JPM globally. Last week, a 115-page lawsuit against JPM was unsealed in New York’s Bankruptcy Court. The papers had been filed late last year by Irving Picard, the US-court appointed trustee for the investment businesses of convicted fraudster, Bernard Madoff. Picard’s lawsuit charges JPM with being the primary banker for Madoff, arguing that “JPMorgan was wilfully blind to the fraud, even after learning about numerous red flags surrounding Madoff. While many financial institutions enabled Madoff’s fraud, JPMorgan was at the very centre of that fraud and thoroughly complicit in it.” The trustee is suing for US$6.4 billion.
Press reports of the unsealed court documents indicate that JPM had filed a suspicious-activity report on its Madoff dealings to the UK’s Serious Organised Crime Agency in October 2008. JP Morgan allegedly told the regulator that concerns around Madoff’s business were based on the “investment performance achieved by its funds which is so consistently and significantly ahead of its peers, year-on-year, even in the prevailing market conditions, as to appear too good to be true – meaning that it probably is.”
In a statement responding to the Picard claims, JP Morgan said the lawsuit “is meritless and is based on distortions of both the relevant facts and the governing law.” The bank says it “did not know about or in any way become a party to the fraud orchestrated by Bernard Madoff,” and that Madoff’s firm “was not an important or significant customer” in the scheme of its overall commercial banking business. JP Morgan intends to defend itself vigorously against the unfounded claims brought by the trustee.”