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 JPMorgan Chase & Co to pay more than $18 million to a trust in a suit stemming from the bank's recommendation of a security that was unsuitable for the trust and benefited the bank.

The bank engaged in misconduct and breached its duties of care to the trust in recommending so-called "variable prepaid forward contracts," wrote Judge Linda Morrissey of the District Court for Tulsa County, Oklahoma, in an opinion late Tuesday.

The contracts were not only unsuitable for the trust, but bestowed a financial benefit to JP Morgan at the trust's expense, the court ruled.

JP Morgan and the trust entered into numerous variable prepaid forward contracts between 2000 and 2005. The investments began 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 physical impairments, the court wrote. The trust was created in 1955 by William Skelly, founder of Skelly Oil Company, and his wife. It was meant to benefit Fletcher, who is Skelly's granddaughter, and her mother.

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

The 32-page court decision illustrates the extent to which certain investment fees and conflicts of interest can damage a portfolio. 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 court ruled.

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

JP Morgan disagrees with the court's decision, a spokesman said in a statement.

The firm "will take all appropriate measures to respond, including appealing the decision," he said.

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 can also involve hefty fees.

The terms of the trust, however, required that its trustee not sell stocks placed in the trust when it was originally set up, with exceptions for "unusual circumstances," according to the opinion. The original stocks included shares in what would eventually become ExxonMobil Corp , according to the court.

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

JPMorgan also breached its fiduciary duty to the trust by investing proceeds from the contracts in its own investment products, the court wrote. It then charged investment fees for those transactions in addition to corporate trustee fees.

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

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

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


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