JPMorgan Chase is aiming to recover millions of dollars from an insurance policy that protected the US bank against fraud after its botched $175mn acquisition of financial aid start-up Frank, according to people familiar with the matter.
The insurance payout would give JPMorgan some financial relief following a deal that chief executive Jamie Dimon has since described as a “huge mistake” and that raised questions about the bank’s due diligence.
JPMorgan earlier this year claimed that it was misled by Frank’s management in the run-up to its $175mn acquisition of the company in 2021, alleging company founder Charlie Javice told the bank her business had 4.25mn customers when in fact it had only 300,000.
The “representations and warranties” insurance policy that JPMorgan took out for the Frank deal applies in cases of fraud and the bank has filed a claim with the underwriter, the people familiar with the matter said.
It is unclear how much JPMorgan will recoup but such policies typically cover between 10 per cent and 20 per cent of a purchase price, which in the Frank deal would amount to between $17.5mn and $35mn.
JPMorgan declined to comment.
Reps and warranties insurance has become increasingly popular in recent years in mergers and acquisitions as a way to protect buyers from unforeseen losses or inaccuracies relating to a transaction after a deal closes.
JPMorgan prefers to take out the policies when possible, according to one person familiar with the matter. The bank bought dozens of smaller companies in 2021 and 2022, a buying spree now being scrutinised by US regulators.
In a countersuit against JPMorgan, Javice has denied the bank’s allegations of falsifying account.
In addition to JPMorgan’s lawsuit, Javice has been charged with fraud by US authorities, who allege she falsified user numbers as part of the sale. She was formally indicted last month on charges that she defrauded the bank and has pleaded not guilty.
Frank, which was shut down by JPMorgan in January, had helped college students apply for financial aid for their education and the lender hoped the acquisition made via its Chase retail banking division would give it greater access to younger customers.
JPMorgan has claimed that problems from the sale emerged months after the deal closed, when the bank discovered that the delivery and open rates for its emails to Frank customers were far lower than expected.
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