Jeffrey Epstein’s life, misdeeds, and death make for a sordid and scandalous tale. Epstein’s story is the backdrop of a new securities class action lawsuit that has been filed against Barclays, its former CEO, James “Jes” Staley, and certain other company executives, in which the plaintiff alleges that Staley and Barclays misled investors about the relationship Staley had with Epstein during Staley’s prior position at JP Morgan Chase Bank. This new complaint’s filing follows shortly after the U.K Financial Conduct Authority in October announced its decision to fine Staley and ban him from officer positions in the financial services industry based on its finding that Staley “recklessly approved a letter to the FCA” that the agency said “misled” the FCA and the Barclays board about Staley’s relationship with Epstein. A copy of the new securities lawsuit complaint, filed on November 1, 2023, can be found here.

Background

During the period 1999 through 2013, Staley worked at JP Morgan, first as head of the bank’s private banking division and later as head of the bank’s asset management division. In December 2015, Staley became CEO of Barclay’s. During his time at JP Morgan, Staley became acquainted with Epstein, who was a client of JP Morgan’s. After the Epstein scandal later came to light, questions arose about the nature and extent of Staley’s relationship with Epstein during Staley’s time at JP Morgan.

In July 2019, Epstein was charged with sex trafficking and conspiracy to commit sex trafficking of minors. In August 2019, Epstein was found dead in his jail cell of apparent suicide. Following Epstein’s indictment and subsequent suicide, news reports circulated about the extent of Epstein’s relationships with various Wall Street executives, including Staley. In response to these articles, Staley and Barclays contended that Staley’s relationship with Epstein was strictly professional.

In its 2019 Annual Report, Barclays disclosed that the FCA had initiated a regulatory inquiry regarding Staley’s relationship with Epstein. The Annual Report also disclosed that Staley had given the company’s board an “explanation” of his relationship with Epstein. The Report stated that based on Staley’s representations and on a review by outside counsel, the board believed that Staley had been “transparent” about his relationship with Epstein, and further that the board recommended Staley for re-election as CEO.

The complaint alleges that these statements were misleading because at the time the board was in possession of emails showing that Epstein and Staley’s relationship went well beyond “professional.” The complaint alleges that Staley’s “close involvement” with Epstein included Stein’s supposed “awareness of Epstein’s crimes and his possibly witnessing or participating in sex crimes.”

In November 2021, Barclays disclosed that it had received the FCA’s “preliminary conclusions” about Staley’s characterizations of his relationship with Epstein; the bank stated that Staley expressed his intention to contest the FCA’s conclusions, and that the Board and Staley had agreed that he would step down as the bank’s CEO. The bank emphasized that the FCA made no findings that Staley saw or was aware of any of Epstein’s crimes.

On November 12, 2021, the Financial Times published an article stating that Staley and Epstein had exchanged 1,200 emails during Staley’s time at JP Morgan and that the emails contained “unexplained phrases,” such as a reference to “snow white.” The FT article further reported that the Barclays board was aware of the emails since at least early December 2019.

In March 2023, JP Morgan filed a third-party complaint against Staley in connection with an action that alleged victims of Epstein’s sex trafficking previously had filed against JP Morgan. The JP Morgan complaint against Staley sought indemnity and contribution in the event that JP Morgan was found liable in the sex trafficking victims’ case. The claimants in the sex trafficking victims’ action alleged that Staley was aware of and observed Epstein’s criminal misconduct prior to his 2013 departure from JP Morgan.

Finally, on October 12, 2023, the FCA announced on its website its decision to fine Staley £1.8 million and to ban him for holding senior management positions in the financial services industry. The announcement included the FCA’s findings, although the announcement also states that Staley has appealed the decision to the Upper Tribunal and accordingly that the findings recited in the decision are “provisional” and reflect the FCA’s belief of what occurred.

The decision states that Staley “recklessly approved” a letter sent by Barclays to the FCA which the FCA says “misled both the FCA and the Barclays Board about the nature of his relationship with Mr. Epstein.” The letter claimed that Staley “did not have a close relationship with Epstein,” while, “in reality,” the FCA says, in emails between the two men Staley described Epstein as “one of the ‘deepest’ and ‘most cherished’ friends.” The letter’s representation of Staley’s relationship with Epstein was “misleading,” and by failing to correct the “misleading statements” in the letter, “Mr. Staley recklessly misled the FCA and acted with a lack of integrity.”

The Lawsuit

On November 1, 2023, a plaintiff securityholder filed a securities class action lawsuit in the Central District of California against Barclays, Staley, and certain other company executives. The complaint purports to be filed on behalf of investors who purchased Barclays American Depositary Receipts (ADRs) between July 22, 2019, and October 12, 2023.

The complaint alleges that the defendants made false or misleading statements or failed to disclose that: “(1) Contrary to his false public assertions, Jes Staley had a close relationship with Jeffrey Epstein; (2) Staley was reportedly aware of Jeffrey Epstein’s criminal activities and may have even sexually assaulted a victim who had previously been trafficked by Jeffrey Epstein; (3) Staley’s close, personal relationship with Jeffrey Epstein, and potential criminal activity, if discovered, could bring reputational, legal, and financial harm to Barclays; (4) as a result, Barclays response to the FCA’s inquiry regarding Staley’s relationship with Epstein was materially false; (5) Barclays, having become aware of information contradicting its response to the FCA’s inquiry, then failed to update the response so that it would be accurate, or otherwise take any meaningful action; and (6) as a result, Defendants’ statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all times.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.

Discussion

As I noted in a recent post (here), one of the more provocative ongoing discussions in the world of corporate and securities litigation these days is whether everything and anything can be turned into a securities fraud allegation. At one level, the scandalous details of Epstein’s alleged criminal misconduct certainly seem far afield from the sort of financial misrepresentations that more traditionally have served as the basis of securities lawsuits. However, there is within the sordid backdrop of this lawsuit the basicl question about whether or not Staley misled Barclays and the FCA about his relationship to Epstein, and whether Barclays and Staley in turn misled investors about the relationship.

The complaint’s allegations raise a host of murky questions about whether the relation between the two men was “professional” or “personal,” and if “personal” what that implies. Many of the accusations in this complaint depend a lot on implication and suggestion rather than direct confirmation; for example, it is entirely possible that in the course of a multiyear business relationship between a bank executive and a client of the bank that they might exchange 1,200 emails, yet the number of emails is meant, in the complaint, to suggest that there was a lot more going on than a relationship Staley tried to tell the world was only “professional.”

There are obviously very disturbing allegations in this complaint (apparently derived from the allegations in the lawsuit filed against JP Morgan by sex trafficking victims) that Staley knew about or was even involved in Epstein’s misconduct. However, the FCA made no findings suggesting that Staley was aware of or involved in the criminal misconduct. It is hard to know what to make of all this.

One detail that did not make its way into the securities lawsuit complaint is fact that the lawsuit that the sex trafficking victims filed against JP Morgan settled in June 2023 based on JP Morgan’s agreement to pay the victims $290 million. At the time the settlement was announced JP Morgan issued a statement saying that Mr. Epstein committed “heinous crimes” and “any association with him was a mistake and we regret it.” The sheer size of this settlement suggests the victims’ allegations – including, it may be asked, the allegations against Staley? – were substantial.

This lawsuit has only just been filed and it remains to be seen how it will fare. One thing that is important to keep in mind is that the claimants in the securities lawsuit are not Epstein’s victims; rather, the claimants are investors. One challenge the plaintiff may face is showing whether and to what extent the investors were harmed.  The price of Barclays ADRs moved only very small amounts in response to the various supposed “revelations” cited in the complaint; in some instances, the price movement was less than one half of one percent of its value. And if even if this really is securities fraud, whose fraud is it?  – it seems to me that if Staley misrepresented his relationship to Epstein, the bank and its board are among those that were misled.

In any event, the annals of securities fraud litigation are once again expanded as increasingly diverse kinds of allegations make their way into securities lawsuit complaints.

One final note. Epstein’s connections with his bankers were serially toxic. Apparently after Epstein ended his connection with JP Morgan in 2013, he moved his banking relationship to Deutsche Bank. After the criminal charges were raised against Epstein, a class of sex trafficking victims filed a separate lawsuit against Deutsche Bank. The victims’ lawsuit against Deutsche Bank settled earlier this year for $75 million. In 2020, Deutsche Bank paid New York banking regulators a $150 million fine over allegations that it failed to sufficiently police its financial dealings with the disgraced financier among other compliance failures.

Readers may recall that in a recent guest post, Francis Kean of McGill & Partners discussed the developments in the UK insolvency proceedings involving the former British multinational construction firm, Carillion plc. A recent interesting video created by the London-based insurer Rising Edge examines what happened with Carillion as well as the exposures and risks that corporate executives face in insolvency. The video features an all-star panel of D&O experts: Francis Kean of McGill; Ed Smerdon of Coverage Matters; James Cooper of Clyde & Co; and Owen Dacey of Rising Edge. The session was moderated by Phillipe Gouraud of Rising Edge. The video can be found here.

In what the Wall Street Journal called a “milestone” in the SEC’s efforts to address public companies’ cybersecurity disclosures, the SEC has filed a civil enforcement action against software company SolarWinds and its Chief Information Security Officer, Timothy Brown. The agency alleges that the company repeatedly misled investors by understating the company’s cyber vulnerabilities and the ability of hackers to penetrate the company’s systems. According to statements from agency officials, the action is intended to send a message about cybersecurity disclosures and disclosure controls. A copy of the SEC’s complaint can be found here. A copy of the SEC’s October 30, 2023, press release about the action can be found here.

Continue Reading SEC Files Cybersecurity Disclosure Suit Against SolarWinds and Exec

I have long thought that there was more than just a kernel of truth to Bloomberg columnist Matt Levine’s oft-quoted quip that “everything everywhere is securities fraud.” Just the same, there are certain circumstances that I have had a hard time seeing as leading to a securities fraud lawsuit. Like, for instance, the migrant crisis at the U.S.-Mexican border. The massive influx of migrants into the U.S. is a serious humanitarian and political emergency. But how on earth could the migrant crisis lead to a securities suit? Well, as it turns out, a securities suit filed last week in the federal court in Manhattan may just answer that question.

Continue Reading Migrant Crisis Circumstances Lead to Securities Lawsuit Filing

It is no secret that I am skeptical of the usefulness of ESG as an analytic tool and even as an intellectual concept. As I have contended, there are fundamental disagreements about what ESG actually means, and the idea that it can be objectively measured and quantified is illusory, at best. Now, in an October 21, 2023, Financial Times op-ed column (here), NYU Business School Professor Aswath Damodaran argues that ESG is “beyond redemption” and it may be time to administer last rites.

Continue Reading Time to Say RIP to ESG?

One of the characteristics of “opt-out” class actions in the U.S. is that class members retain the option of opting out of the class settlements. A new study shows that in recent years, opt-outs are becoming an increasingly common phenomenon in securities class action settlements, particularly in connection with securities cases having certain traits. The Cornerstone Research study, entitled “Opt-Outs in Securities Class Action Settlements: 2019-H1 2022” can be found here. Cornerstone Research’s October 25, 2023, press release about the report can be found here.

Continue Reading Cornerstone Research: Securities Suit Opt-Outs Increasingly Frequent in Large, Complex Cases
Jane Njavro

One of the continuing issues in the world of directors’ and officers’ liability insurance in recent years has been the question of when a U.S.  company should obtain a separate locally admitted D&O insurance policy for its foreign subsidiaries. In the following guest post, Jane Njavro, Senior Vice President and Partner at Woodruff Sawyer, examines the issues surrounding this perennial question. This article was originally published on Woodruff Sawyer’s D&O Notebook, here. I would like to thank Jane for allowing me to publish her article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Jane’s article.

Continue Reading Guest Post: Foreign Subsidiaries and D&O Insurance: Are You Prepared to Place?

Some D&O insurance policy exclusions are written with the broad “based upon, arising out of, in any way relating to” preamble. These exclusions sweep broadly, precluding coverage for a wide range of claims. The ever-present question when insurers seek to rely on these exclusions’ sweeping reach is: how broad of a reach it too broad? What is the outer limit of these exclusions’ preclusive effect?

In a decision that is worth reading closely, the Delaware Supreme Court recently concluded that, despite its broad preamble, a management liability insurance policy’s professional services exclusion did not apply to preclude coverage for the underlying claim. The decision not only explores important questions about the reach of exclusions with the broad preamble, but it also underscores the deeper question about the use of the broad preamble for these types of exclusions in the first place. The Delaware Supreme Court’s September 14, 2023, opinion in the case can be found here.

Continue Reading The “Broad Preamble” Problem in D&O Insurance Exclusions

I have been writing this blog for a long time now, and the one thing that I know from the experience is that there is always something new. The latest novelty to develop is the emergence of class action litigation related to employers’ alleged violation of statutorily mandated pay range disclosure requirements. Several states, including the state of Washington, have enacted laws requiring the disclosure in job postings of salary or wage ranges. Class action plaintiffs’ attorneys are quickly targeting employers for alleged violations of these laws, with an at least theoretical potential for massive damage awards. As discussed below, this newly and quickly emerging class of litigation could present some interesting insurance questions. An October 17, 2023, memo from the Ogletree Deakins law firm discussing the new statutory requirements and emerging litigation can be found here.

Continue Reading Emerging Pay Range Disclosure Class Action Suits and Related Insurance Issues

In a lengthy and detailed opinion, the Fifth Circuit has rejected two petitions challenging the SEC’s approval of Nasdaq’s board diversity rules. The rules require most Nasdaq-listed companies to have women and minority directors on their boards or explain why they don’t. The petitioners had argued that the rules violated constitutional free speech and equal protection provisions and also violated the SEC’s obligations under the Exchange Act and under the Administrative Procedures Act (APA). A unanimous three-judge panel rejected these arguments, in effect upholding the rules. The Fifth Circuit’s opinion can be found here.


Background

Nasdaq is private company that operates a securities exchange. In December 2020, Nasdaq submitted to the SEC proposed rules directing its listed companies to add women and underrepresented minorities to their boards. As discussed here, in August 2021, following a public comment period, a divided SEC approved the rules by a vote of 3-2.

Under the Nasdaq rules, each Nasdaq company (other than foreign issuers, smaller reporting companies, and companies with smaller boards) is require to have, or to explain why it does not have, at least two board members of its board of directors who are “Diverse,” including at least one Diverse director who self-identifies as Female and alt least on Diverse director who self-identifies as an Underrepresented Minority or LGBTQ+. Reporting companies are to report their compliance or non-compliance with the diversity requirements using a Board Diversity Matrixv. The rules also make complementary board recruiting services available to exchange-listed companies, to provide access to a network of diverse candidates for companies to identify and evaluate.

The Petitions Challenging the Rules

Just days after the SEC approved the rules, a nonprofit group called the Alliance for Fair Board Recruitment (AFBR) filed a petition with the Fifth Circuit challenging the rules on constitutional and statutory grounds. AFBR is headed by Edward Blum, the conservative legal activist who spearheaded the legal challenge brought against Harvard’s and the University of North Carolina’s affirmative action admissions policies; in June 2023, the U.S. Supreme Court entered an opinion striking down the admissions practices. A second petitioner, the National Center for Public Policy Research (NCPPR), filed a separate petition challenging the rules on similar grounds. The two proceedings were later consolidated in the Fifth Circuit.

The petitioners argued that the rules imposed an impermissible quota on companies that violates the equal protection clause of the Fourteenth Amendment by encouraging discrimination against potential board members. The petitioners also argued that the ruled compel disclosure of controversial information in violation of the First Amendment. In addition, the petitioners further argued that the SEC lacked statutory authority to issue the order approving the rules, and that the SEC’s approval also violates the APA.

The October 18, 2023, Decision

On October 18, 2023, in an opinion written by Judge Stephen Higginson for a unanimous three-judge panel, the Fifth Circuit rejected the petitioners’ challenge to the Nasdaq rules.

The appellate court first considered the petitioners’ constitutional arguments, beginning the analysis by noting that the Constitution “only applies to state action.” The petitioners had argued that Nasdaq qualifies as a state actor; the appellate court rejected all of the grounds on which the petitioner sought to rely to try to establish this point, specifically noting that the SEC’s involvement with and approval of the rules did not subject the rules to constitutional scrutiny, and further that Nasdaq does not become a state actor merely because it is regulated.

The appellate court also rejected the petitioners’ argument that the SEC’s approval of the rules exceeded its statutory authority and violated the APA, saying that the petitioners have “given us no reason to conclude that the SEC’s Approval Order violates the Exchange Act or the APA.” The appellate court concluded that the agency was within its authority in approving the rules.

Discussion

The Fifth Circuit’s decision in effect upholding the Nasdaq rules stands in interesting contrast to the outcome of the earlier proceedings challenging the validity of the California board diversity statute. As discussed here, earlier this year, a federal court struck down the California board diversity statute as unconstitutional; indeed, a state court had previously stuck down the California statute on state law grounds. There is of course an important difference between the Nasdaq rules and the California statute, as the action of the California legislature in enacting the statute obviously involves state action.  Interestingly, the federal court challenge to the California board diversity statute was also led by an organization affiliated with Edward Blum, the legal activist who heads AFBR.

The outcome of the Fifth Circuit proceedings is also interesting on another level; it could be argued that the court’s rejection of the petitions challenging the rules is a surprise outcome. AFBR had filed its petition challenging the Nasdaq board diversity rules in the Fifth Circuit because the appellate court is widely perceived as one of the most conservative circuit courts in the country. 12 of the 16 active judges on the Fifth Circuit bench were nominated to the court by Republican presidents. Yet somehow the three judges on the panel that decided the challenge to Nasdaq’s board diversity rules were nominated for the appellate court by Democratic presidents. Given the composition of the three-judge panel as compared to the overall Fifth Circuit bench, the petitioners could well conclude that they would be well-advised to seek en banc review of the three-judge panel’s decision.

Whether or not there is en banc review of the decision, we almost certainly have not heard the last of the petitioners’ challenges to Nasdaq’s board diversity rules. Blum, the legal activist who led the challenge to Harvard and UNC’s affirmative action admissions policies, is steering the challenge to Nasdaq’s board diversity rules; with the benefit of financial backing from numerous conservative groups and think-tanks, Blum undoubtedly is prepared to pursue the legal challenge to the Nasdaq’s rules all the way to the U.S. Supreme Court. Notwithstanding the financial wherewithal to pursue the continued legal challenge, he is going to face an uphill battle trying to establish sufficient “state action” to support the constitutional challenge.