JP Morgan will look to insurance to recover millions of dollars from its botched $175 million Frank deal on the basis of alleged fraud, according to sources familiar with the matter, the Financial Times has reported.
The bank has claimed it was duped into the purchase of student financial aid start-up Frank. Frank CEO Charlie Javice has filed a counterclaim against the bank, denying allegations of falsifying account, the Financial Times reported.
In April, the Securities and Exchange Commission (SEC) charged Javice, alleging in its complaint that the CEO had “orchestrated a scheme” to trick JP Morgan into believing 4.25 million students had used its service, when the alleged true number was less than 300,000.
The representations and warranties insurance policy that JP Morgan had in place for the Frank deal covers cases of fraud, sources familiar with the matter reportedly told the Financial Times.
Such policies typically cover 10% to 20% of a purchase price, which in this case could represent between $17.5 million and $35 million, the Financial Times reported.
Such claims were labelled “highly unusual” by Liberty GTS president Rowan Bamford in a comment shared with Insurance Business.
“It is not uncommon, of course, for insurance claims to be made on M&A insurances (known as Representations and Warranties in the US) some time after a deal has closed,” Bamford said. “However, the vast majority of claims we see are brought on the grounds of breaches of contractual warranty, and very few involve allegations of fraud.”
Even where a claimant may think a seller was “less than honest” in disclosing information such as sales contracts, pending lawsuits or tax liabilities, claims are nevertheless typically pursued as breaches in warranty rather than under fraud as this is often harder to prove, according to Bamford.
“A fraud claim allows the insurer, should the claim be paid out, to try and recoup their own costs by suing the individuals who formerly owned and ran the company or who are seen as responsible for the fraud,” Bamford said. “The implication of JP Morgan claiming this on the basis of fraud therefore opens up the possibility of Frank’s company founder, Charlie Javice becoming personally subject to a claim for the huge losses and costs that JP Morgan have incurred.”
JP Morgan was approached for comment.
