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. (Image)
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)
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 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.
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