Trust accounts often require firm advisers to be even more diligent in putting clients' interests ahead of the banks'. This week, an Oklahoma judge found J.P. Morgan was “grossly negligent and reckless†in its administration of one client's trust account and ordered the bank to pay $18 million.
In a harshly worded opinion released late Tuesday Judge Linda Morrissey of the United States District Court for Tulsa County said that the bank breached a series of fiduciary duties in its handling of the trust of the late Carolyn S. Burford, an oil heiress. The court also ordered J.P. Morgan to pay punitive damages, to be set at a later date, along with the trust's legal fees.
Judge Morrissey concluded that J.P. Morgan had breached its fiduciary duty in 2000 when it sold what are known as variable prepaid forward contracts to the trust, a complex fee-rich product that the judge determined was unsuitable for the trust.
“We disagree with the court's decision and will take all appropriate measures to respond, including appealing the decision,†J.P. Morgan said in a statement. A lawyer for the plaintiff did not return a call for comment.
This case is likely to put a bright spotlight on trust accounts. Under the current law, some stockbrokers are required to act in a customer's best interest - but that is a less-stringent standard that allows them to sell products that are suitable, but not necessarily in a client's best interest. Brokers who handle trust accounts are held to the higher standard and have to do what is best for the client alone.
The contracts were pitched as a way to generate more income for the trust, which was established in 1955 by Ms. Burford's parents; the trust now benefits Ann Fletcher, Ms. Burford's daughter. Carolyn Burford's father founded Skelly Oil and her mother had ties with another oil company. The trust initially contained a significant amount of ExxonMobil stock. J.P. Morgan and th e trust entered into several variable prepaid forward contracts from 2000 to 2005.
The judge found that J.P. Morgan - which ended up with the account after a series of bank mergers - did not properly explain the product to its client and failed to disclose that the bank was benefiting from the transaction. The bank also breached its duty when it invested the proceeds of the contracts in its own investment products, which the judge said “amounted to double dipping†that was unreasonable.
“The bank provided incentives to its employees to generate revenue for the bank. This created a situation in which the self interest of employees managing and advising fiduciary accounts was placed in conflict with the interest of those to whom the bank owed fiduciary duty,†the judge wrote. The misconduct in the case, the judge added, shows a serious disregard for customers of the bank, which was aware “or recklessly failed to be aware†of the conduct at issue.
“The court finds that beyond simply restoring the trust in the position in which it should have been maintained, it is appropriate to assess punitive damages for the sake of example and by way of punishing the bank for its conduct,†Judge Morrissey wrote.
