[ by Howard Haykin ]

JPMorgan "Double-Dipped" on Fees, Ordered to Pay Punitive Damages.

JPMorgan Chase & Co. was found guilty of improperly recommending that a trust purchase a type of complex security that was unsuitable for the institutional customer, a U.S. state court judge ruled.  The judge also found that the bank inappropriately benefited by effecting the transaction. 

JPMorgan engaged in misconduct and breached its duties of care to the trust in recommending so-called "variable prepaid forward contracts" that caused financial harm to the trust beneficiaries.  That sentiment was expressed by Judge Linda Morrissey of the District Court for Tulsa County, OK, in a 32-page opinion delivered late Tuesday.

Relevant Facts and Circumstances in the Case. 

• JPMorgan and the trust entered into numerous variable prepaid forward contracts between 2000 and 2005.  In 2007, a court ordered the transfer of the trust's assets to another bank.
• In an unusual move, the court also ordered JPMorgan to pay punitive damages, to be determined at a later date, along with the trust's legal fees.

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 also can involve hefty fees.

• The court noted in its decision that the transaction illustrates the extent to which certain investment fees and conflicts of interest can damage a portfolio. 
• JPMorgan was obligated to act in the trust's best interests, but was deemed to have breached its fiduciary duty to the trust, as follows:
  • bank invested proceeds from the contracts in its own investment products, then charged investment fees for those transactions in addition to corporate trustee fees.
    • that effectively "amounted to double dipping that was inherently unreasonable."
• The judge deemed it appropriate to levy punitive damages against JPMorgan because, in the judge's words, the bank "has been guilty of reckless disregard for the rights of others."

For further details, go to:  [Reuters, 10/10/12].