* Court finds JP Morgan engaged in self-dealing
* Earned fees with complex contracts recommendation
By Suzanne Barlyn
Oct 10 A U.S. state court has ordered JPMorgan
Chase & Co to pay more than $18 million to a trust in a
suit stemming from the bank's recommendation of a security that
was unsuitable for the trust and benefited the bank.
The bank engaged in misconduct and breached its duties of
care to the trust in recommending so-called "variable prepaid
forward contracts," wrote Judge Linda Morrissey of the District
Court for Tulsa County, Oklahoma, in an opinion late Tuesday.
The contracts were not only unsuitable for the trust, but
bestowed a financial benefit to JP Morgan at the trust's
expense, the court ruled.
JP Morgan and the trust entered into numerous variable
prepaid forward contracts between 2000 and 2005. The investments
began after Ann Fletcher, the trust's current beneficiary,
became a co-trustee with JP Morgan at the bank's suggestion.
Fletcher has a history of cognitive and physical
impairments, the court wrote. The trust was created in 1955 by
William Skelly, founder of Skelly Oil Company, and his wife. It
was meant to benefit Fletcher, who is Skelly's granddaughter,
and her mother.
A court in 2007 ordered the transfer of the trust's assets
to another bank. The investment contracts between the trust and
JP Morgan had been settled by then.
The 32-page court decision illustrates the extent to which
certain investment fees and conflicts of interest can damage a
portfolio. JPMorgan breached its fiduciary duty to the trust -
which required the bank to act in the trust's best interests -
by profiting from certain investments it recommended, the court
Judge Morrissey, in an unusual move, also ordered JPMorgan
to pay punitive damages, to be determined at a later date, along
with the trust's legal fees.
JP Morgan disagrees with the court's decision, a spokesman
said in a statement.
The firm "will take all appropriate measures to respond,
including appealing the decision," he said.
Investors who buy variable prepaid forward contracts
typically agree to give a certain number of stock shares to the
brokerage at a future date, but receive a significant percentage
of the value of those shares at the time of the agreement.
While the arrangements can have tax benefits and help insulate
investors from certain losses, they can also involve hefty fees.
The terms of the trust, however, required that its trustee
not sell stocks placed in the trust when it was originally set
up, with exceptions for "unusual circumstances," according to
the opinion. The original stocks included shares in what would
eventually become ExxonMobil Corp, according to the
JP Morgan did not tell Fletcher, now 75 years old, that the
contracts could lead to the sale of that stock, according to the
JPMorgan also breached its fiduciary duty to the trust by
investing proceeds from the contracts in its own investment
products, the court wrote. It then charged investment fees for
those transactions in addition to corporate trustee fees.
That "amounted to double dipping that was inherently
unreasonable," Judge Morrissey wrote.
Punitive damages against JPMorgan are appropriate in the
case because the bank "has been guilty of reckless disregard for
the rights of others," the judge added.