UPDATE 2-JPMorgan must pay $18 mln in trust mismanagement case

(Adds comment from JP Morgan in sixth paragraph)

By Suzanne Barlyn

Oct 10 (Reuters) - A U.S. state court has ordered JPMorganChase & Co to pay more than $18 million to a trust in asuit stemming from the bank's recommendation of a type ofcomplex security that was unsuitable for the trust and benefitedthe bank.

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.The contracts were not only unsuitable for the trust, butbestowed a financial benefit to JP Morgan at the trust'sexpense, the court ruled.

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 32-page court decision illustrates the extent to whichcertain investment fees and conflicts of interest can damage aportfolio. 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 courtruled.

Judge Morrissey, in an unusual move, also ordered JPMorganto pay punitive damages, to be determined at a later date, alongwith the trust's legal fees.

JP Morgan disagrees with the court's decision, a spokesmansaid in a statement. The firm "will take all appropriatemeasures to respond, including appealing the decision," he said.

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.

JPMorgan, the court wrote, breached its fiduciary duty tothe trust 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.

(Reporting By Suzanne Barlyn; Editing by Alden Bentley)


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