Recently, on October 9, 2012, Judge Linda Morrissey of the District Court for the District of Tulsa County, Oklahoma ordered JP Moran Chase & Co. (“JP Morgan”) to pay over $18 million to its client, a trust, based upon its recommendation of an unsuitable security which ultimately economically benefited JP Morgan. The Court concluded that the bank engaged in misconduct and breached its duty of care when it recommended that the trust purchase variable prepaid forward contracts. Typically, investors who purchase variable prepaid forward contracts agree to give a set number of shares to the broker-dealer on a predetermined future date. The investor receives a high percentage of the value of the shares, as well as a portion of the gains, at the time of the transfer. If the shares incur a loss, the broker dealer absorbs it. This investment provides significant tax advantages for investors and protects the investor from losses, however, simultaneously generates magnanimous investment fees for the broker dealer.
The trust at issue was created in 1995 by William Skelly, founder of Skelly Oil Company, for the benefit of Mr. Skelly’s physically and mentally impaired granddaughter. JP Morgan recommended that it become a co-trustee of the trust, and thereafter between 2000 and 2005, recommended that the trust invest in the variable prepaid forward contracts. When JP Morgan became the co-trustee of the trust, a plethora of conflicts of interest arose, particularly regarding JP Morgan’s receipt of lucrative investment fees associated with the recommendation of the unsuitable variable prepaid forward contracts. Moreover, the District Court held that by acting as the trust’s co-trustee, JP Morgan breached the fiduciary duty it owed to its customer by failing to put the trusts’ best interests first. Pursuant to the terms of the trust agreement, JP Morgan, as co-trustee, was prohibited from selling shares placed in the trust during the trust’s initial inception, except in “unusual circumstances.” The District Court held that JP Morgan breached its fiduciary duty to the trust by failing to inform the beneficiary that the variable prepaid forward contracts could cause the original shares in the trust to be sold, which would violate the trust’s provisions. Additionally, the District Court held that JP Morgan breached its fiduciary duty when it reinvested the proceeds from the variable prepaid forward contracts into its own proprietary investment product and then charged investment fees for these transactions. Not only was JP Morgan held liable for compensatory damages, but it was also ordered to remit punitive damages (the amount of which will be determined by the Court at a later date) and attorneys’ fees. Specifically, the Court stated that punitive damages were appropriate because JP Morgan was “guilty of reckless disregard for the rights of others.” Representatives of JP Morgan stated that they vehemently disagree with the Court’s decision and will take all necessary steps to appeal the decision.
Lax & Neville LLP can effectively assist investors, on both a regional and national level, that may have suffered losses as a result of their broker dealer’s misrepresentations and/or disregard for their investment interests. Please contact our team of securities fraud attorneys for a consultation at (212) 696-1999.