JPMorgan Chase & Co plans to recoup millions of dollars from a policy that protected the U.S. bank from fraud after its $175 million acquisition of financial assistance startup Frank fell through, according to people familiar with the matter.
The insurance payout will give JPMorgan some financial relief after Chief Executive Jamie Dimon called the deal a “huge mistake” and raised questions about the bank’s due diligence.
JPMorgan claimed earlier this year that it was misled by Frank’s management ahead of its $175 million acquisition in 2021, alleging that company founder Charlie Jarvis told the bank her firm had 4.25 million customers, while Actually only 300,000.
The “representations and warranties” insurance policy JPMorgan insured for the Frank deal was applicable in cases of fraud, and the bank has filed a claim against the underwriters, the people said.
It’s unclear how much JPMorgan will get back, but such policies typically cover 10% to 20% of the purchase price, which in Frank’s deal would amount to $17.5 million to $35 million.
JPMorgan declined to comment.
Representation and surety insurance has grown in popularity in mergers and acquisitions in recent years as a way to protect buyers from unforeseen losses or inaccuracies related to the deal after it closes.
JPMorgan would prefer to cancel the policies if possible, according to a person familiar with the matter. The bank has bought dozens of smaller companies in 2021 and 2022, a spree that is now under scrutiny from U.S. regulators.
In a countersuit against JPMorgan, Jarvis has denied allegations that the bank falsified accounts.
In addition to the JPMorgan lawsuit, Jarvis has also been accused of fraud by U.S. authorities, alleging that she falsified user numbers in the sales process. Last month, she was formally charged with defrauding the bank, but pleaded not guilty.
Frank, which was shut down by JPMorgan in January, had helped college students apply for educational financial aid, and the bank hoped the acquisition through its Chase retail banking unit would make it easier to reach younger clients.
Problems with the sale arose a few months after the deal closed, JPMorgan claims, when the bank discovered that the send and open rates of its emails to Frank’s clients were far lower than expected.