JPMorgan Chase & Co. (JPM:US) was ordered by an Oklahoma court to pay $18.1 million to the trust fund of a 75-year-old oil heiress for selling her derivatives that she claimed she didn’t understand.
The bank must also pay punitive damages to the Carolyn S. Burford Trust, which benefits the granddaughter of Oklahoma oilman William G. Skelly, Tulsa County District Court Judge Linda Morrissey ruled yesterday. The evidence “overwhelmingly demonstrates the bank’s grossly negligent and reckless administration of the trust,” Morrissey said.
The trust lost a “substantial” amount of money on contracts called variable prepaid forwards, which bankers at Bank One Trust Co. sold to Ann Fletcher in 2000 as a way to generate more income, according to the ruling. After Bank One Corp. merged (JPM:US) with New York-based JPMorgan in 2004, the bank managed the trust for two more years.
“This bank developed a strategy whereby they could utilize the funds in this trust in order to purchase investment products from their own equity division,” Erin Donovan, a lawyer in Tulsa who represented Fletcher, said in a phone interview. “She thought they were her friends.”
The bank breached its fiduciary duty when it sold the derivatives, Morrissey wrote. Bankers were given incentives to push the variable prepaid forwards, which generated as much as $2 million in fees, she said.
Douglas Morris, a spokesman for JPMorgan, said in an e-mail that the bank disagrees with the decision and will respond with “all appropriate measures,” including an appeal.
The trust, which held shares of Exxon Mobil Corp. (XOM:US), was created in 1955 by Fletcher’s grandparents, according to the ruling. Her grandfather founded Skelly Oil Co. and his 9,000- square-foot red-brick mansion is now the official residence of the president of the University of Tulsa, according to the school’s website.
The trust will be given to the Oklahoma Annual Conference of the United Methodist Church and Fletcher’s children when she dies. The bankers didn’t consult these beneficiaries about the derivatives or when Fletcher requested higher annual payments, the judge said.
In the variable prepaid forwards, the trust used the Exxon Mobil shares as collateral for loans, then invested the proceeds in municipal bond funds, said Craig McCann, who testified as an expert witness for the plaintiffs. The contracts also involved buying and selling put and call options on the stock, giving up gains beyond a certain level, said McCann, the founder of Securities Litigation & Consulting Group.
“These are proprietary products,” McCann said in a phone interview. “The bank is on the other side of the deal.”
Fletcher, whose husband died in 1997, had medical problems and was cognitively impaired at the time the bank recommended the derivatives, according to the ruling. She wrote to the bank in 1999, stating “I’m scared to do puts & calls,” according to Morrissey. She relied on the bankers for advice when she agreed to buy the derivatives a year later, the judge said.
“She felt they were wonderful people who were looking after her best interest,” Donovan said. “She invited them to parties at her home.”
The case is Trust of Carolyn S. Burford v. JP Morgan, PT- 2006-013, Tulsa County District Court, Tulsa (Oklahoma).
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