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UPDATE 3-JPMorgan must pay $18 mln in trust mismanagement case

* Court finds JP Morgan engaged in self-dealing

* Earned fees with complex contracts recommendation

(Adds background details on court ruling.)

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 security thatwas unsuitable for the trust and benefited the 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. The investmentsbegan 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 physicalimpairments, the court wrote. The trust was created in 1955 byWilliam Skelly, founder of Skelly Oil Company, and his wife. Itwas meant to benefit Fletcher, who is Skelly's granddaughter,and her mother.

A court in 2007 ordered the transfer of the trust's assetsto another bank. The investment contracts between the trust andJP Morgan had been settled by then.

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 appropriate measures 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.

The terms of the trust, however, required that its trusteenot sell stocks placed in the trust when it was originally setup, with exceptions for "unusual circumstances," according tothe opinion. The original stocks included shares in what wouldeventually become ExxonMobil Corp , according to thecourt.

JP Morgan did not tell Fletcher, now 75 years old, that thecontracts could lead to the sale of that stock, according to thecourt.

JPMorgan also breached its fiduciary duty to the trust byinvesting proceeds from the contracts in its own investmentproducts, the court wrote. It then charged investment fees forthose transactions in addition to corporate trustee fees.

That "amounted to double dipping that was inherentlyunreasonable," Judge Morrissey wrote.

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

(Reporting By Suzanne Barlyn; Editing by Alden Bentley andAndre Grenon)

((Suzanne.Barlyn@thomsonreuters.com)(646-223-8550)(Reuters

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

Keywords: JPMORGAN TRUSTCASE