Wandel v. James, 135 A.D.3d 515

Background

In 2012 JPMorgan’s Chief Investment Office (CIO) suffered at least $6.2 billion in losses from its synthetic credit portfolio (the “London Whale”), despite public statements that the CIO engaged in low‑risk hedging.
Shareholders (Wandel) filed a derivative suit alleging directors breached fiduciary duties by failing to implement proper oversight, internal controls, and risk management; no pre‑suit demand was made on JPMorgan’s board.
Plaintiffs argued demand was futile because a majority of the board faced a substantial likelihood of liability for conscious disregard of numerous red flags (shareholder letters, regulator warnings, risk‑limit breaches) and because the board had reached a self‑serving conclusion without a reasonable investigation.
Delaware law governs demand futility for this Delaware‑incorporated corporation; plaintiffs proceeded under the Caremark oversight‑liability theory (failure to monitor and in good faith ensure reporting systems).
Under Rales, demand is excused only if particularized facts raise a reasonable doubt that a majority of the board could exercise independent, disinterested business judgment because they face a substantial likelihood of liability.
The court found plaintiffs at most alleged that four of eleven directors faced substantial likelihood of liability (inside director Dimon and three Risk Policy Committee members); a majority remained independent, so demand was not excused.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Was pre‑suit demand excused as futile?	Majority of board faced substantial likelihood of liability for conscious disregard of oversight duties based on red flags and regulatory warnings.	A majority of directors were independent and not substantially likely to be liable; plaintiffs failed to plead sustained or systematic board failure.	Demand was not excused; dismissal without prejudice affirmed.
Did plaintiffs plead a viable Caremark claim?	Board ignored sustained red flags and failed to implement adequate information/reporting systems, showing bad faith.	Caremark is a high bar; plaintiffs did not allege sustained or systematic oversight failure or bad faith.	Caremark claim not sufficiently pleaded; allegations showed isolated warnings, not sustained board failure.
Can knowledge of warnings to some directors be imputed to the whole board for demand excusal?	Yes — red flags that reached certain directors show board awareness and failure.	Delaware law does not permit imputing one director’s knowledge to all for demand‑futility purposes.	Knowledge of individual directors could not be wholesale imputed; isolated warnings insufficient.
Does a board’s prior internal conclusion of no breach excuse demand?	Board’s self‑concluding finding was self‑serving and not based on a reasonable, good‑faith investigation, so demand is excused.	A board conclusion does not automatically excuse demand absent particularized facts showing the investigation was unreasonable or in bad faith.	Board conclusion did not excuse demand; plaintiffs failed to show the investigation was inadequate or in bad faith.

Key Cases Cited

In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996) (establishes directors’ duty to monitor and that bad‑faith failure to do so can ground liability)
Rales v. Blasband, 634 A.2d 927 (Del. 1993) (test for demand futility when derivative suit challenges board oversight)
Stone v. Ritter, 911 A.2d 362 (Del. 2006) (explains Caremark and duty of loyalty/good‑faith standard for oversight liability)
Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007) (refuses wholesale imputation of one director’s knowledge to the entire board for demand excusal)
In re Citigroup Inc. Shareholder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009) (addresses demand futility and derivative pleading standards)
Blaustein v. Lord Baltimore Capital Corp., 84 A.3d 954 (Del. 2014) (reaffirms that a majority of independent directors prevents demand excusal)