Espinoza v. Dimon, 2015 U.S. App. LEXIS 14432

Espinoza, a JPMorgan shareholder, sued to challenge the JPMorgan Board's rejection of his demand to pursue action against London Whale miscreants.
The London Whale debacle involved CIO trading losses and a modified VaR model approved by Dimon, with total losses exceeding $6.25 billion.
Espinoza alleged the board's investigation focused only on losses and failed to address allegedly misleading statements about those losses.
The district court dismissed for failure to state a claim, holding the board acted within the business-judgment rule based on the investigation.
The Second Circuit held derivative-dismissal standards were improper under its prior rule and reviewed the case de novo, and certified a Delaware Supreme Court question on scope of investigation.
The court acknowledged uncertainty in Delaware law about evaluating scope of investigations and moved to certification to resolve whether focusing on underlying wrongdoing while ignoring misstatements constitutes gross negligence.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Standard of review for derivative dismissals	Espinoza argues de novo review should apply to Rule 23.1 dismissals.	Dimon et al. argue traditional abuse-of-discretion review applies for derivative actions.	Dismissals are reviewed de novo.
Scope of board investigation when a demand covers multiple issues	Board failed to investigate misstatements about losses; scope was too narrow.	Boards have broad discretion over investigative procedures and need not cover every issue.	Delaware law lacks direct guidance; court certifies Delaware Supreme Court question on appropriate factors for gross negligence when focus excludes material misstatements.
Whether the complaint states a wrongful refusal	Board's refusal was wrongful because it abdicated duty by ignoring misstatements.	Board acted within business-judgment rule based on thorough investigation of losses.	Court adopts de novo review and refrains from ruling on sufficiency pending Delaware Supreme Court guidance on scope.
Role of misstatements vs. losses in the demand	Misstatements are a major component and should be investigated for liability.	Investigation into losses suffices; misstatements fall outside scope of required inquiry.	In recasting scope, the court notes the line between properly informing and gross negligence is case-specific and unsettled under Delaware law.

Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (business-judgment presumption; directors informed and acting in best interests)
Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (clarifies business-judgment review; setting framework for derivative actions)
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (S. Ct. 2007) (plausibility standard in evaluating securities-fraud claims; analogous to required pleading in derivative context)
Kaster v. Modification Sys., Inc., 731 F.2d 1014 (2d Cir. 1984) (abuse-of-discretion background for earlier derivative-review precedent)
Lewis v. Graves, 701 F.2d 245 (2d Cir. 1983) (demand futility depends on case facts; discretionary approach historically used)
Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133 (2d Cir. 2004) (supports de novo standard for Rule 23.1 in derivative actions)
Halebian v. Berv, 590 F.3d 195 (2d Cir. 2009) (derivative-action pleading standards; de novo considerations)
RCM Sec. Fund, Inc. v. Stanton, 928 F.2d 1318 (2d Cir. 1991) (Delaware business judgment rule and standard of review guidance)