UPDATE 1-JPMorgan must pay $18mln in trust mismanagement case

Oct 10 (Reuters) - JPMorgan Chase & Co must pay morethan $18 million to a trust in a suit stemming from its improperrecommendation of a type of complex security that was unsuitablefor the trust and benefited the bank, a U.S. state court judgehas ruled.

The bank engaged in misconduct and breached its duties ofcare to the trust in recommending so-called "variable prepaidforward contracts," wrote Judge Linda Morrissey of the DistrictCourt for Tulsa County, Oklahoma, in an opinion late Tuesday.That caused financial harm to the trust beneficiaries.

JP Morgan and the trust entered into numerous variableprepaid forward contracts between 2000 and 2005. A court, in2007, ordered the transfer of the trust's assets to anotherbank. The investment contracts between the trust and JP Morgan,by that time, had been settled.

The court, in an unusual move, also ordered JPMorgan to paypunitive damages, to be determined at a later date, along withthe trust's legal fees.

Investors who buy variable prepaid forward contractstypically agree to give a certain number of stock shares to thebrokerage at a future date but receive a significant percentageof the value of those shares at the time of the agreement.While the arrangements can have tax benefits and help insulateinvestors from certain losses, they can also involve hefty fees.

The 32-page court decision illustrates the extent to whichcertain investment fees and conflicts of interest can damage aportfolio. JPMorgan, for example, breached its fiduciary duty tothe trust - which required the bank to act in the trust's bestinterests - by investing proceeds from the contracts in its owninvestment products. It then charged investment fees for thosetransactions in addition to corporate trustee fees, JudgeMorrissey wrote. That "amounted to double dipping that wasinherently unreasonable," she wrote.

Punitive damages against JPMorgan are appropriate in thecase because the bank "has been guilty of reckless disregard forthe rights of others," the judge wrote.

A JPMorgan spokesman declined to immediately comment.

(Reporting By Suzanne Barlyn; Editing by Alden Bentley)


Messaging: suzanne.barlyn.reuters.com@reuters.net))