JPMorgan Fails with Frank but Wins with RWI
By Yelena Dunaevsky, Esq., SVP & Partner, Transactional Insurance, Woodruff Sawyer
In a June 21, 2023, article, Financial Times reported that JPMorgan is leaning on a representations and warranties insurance (RWI) policy to recoup at least some of its losses from its disastrous acquisition of financial aid start-up Frank. JPMorgan acquired Frank in September of 2021 and realized a few months later that Frank’s founder, Charlie Javice, fabricated a list of over 4.25 million customers to entice JPMorgan into paying $175 million for the acquisition. JPMorgan sued Javice in 2022; in April 2023 the U.S. Securities and Exchange Commission (SEC) charged her with fraud, and she was arrested on criminal charges brought by the U.S. Department of Justice (DOJ).
While JPMorgan’s losses amount to at least $175 million as a result of the botched acquisition and the legal fees it is expending on the lawsuit, it will likely be successful in securing a payment from its RWI policy. Typically, a purchaser looking to acquire stock or assets of a target buys this type of insurance during the acquisition to protect itself against the seller’s breaches of representations and warranties in the purchase agreement. An additional important benefit of an RWI policy for a purchaser is the protection against seller’s fraud. If fraud exists, and in this case, the SEC and DOJ charges seem to point in that direction, the RWI policy would pay for losses associated with it.
It is likely that JPMorgan did not insure its $175 million transaction for the entire purchase amount. Typically, the insured purchases a policy with a limit of around 10% of the enterprise value of the deal. So, in this situation, JPMorgan will likely be seeking around $17.5 million from the insurance carrier. It could take a few months for the carrier to process the claim, but JPMorgan’s “huge mistake” in acquiring Frank could be somewhat cushioned by a well-bought RWI policy.
The insurance carrier does have subrogation rights under the policy to seek recourse against the seller for fraud, which means that Frank will not be entirely off the hook here. Whether there will be any assets to seek recourse from is another question, but at least for JPMorgan, the decision to buy this RWI insurance policy should prove to be a much wiser move than the decision to acquire Frank.