Investors Should Be Wary of Variable Prepaid Forward Transactions


Variable prepaid forward transactions result in a huge judgment against JPMorgan. An Oklahoma state court judge recently found that JPMorgan Chase breached its fiduciary duty as a co-trustee of a trust and ordered it to pay more than $18 million, including punitive damages for “reckless disregard for the rights of others.” In a 32-page opinion, Judge Linda Morrissey found that JPMorgan breached its fiduciary duty to the trust by recommending unsuitable transactions and engaging in self-dealing at the expense of the trust and its beneficiaries.

JP Morgan and the trust entered into numerous derivative contracts called variable prepaid forward contracts. These contracts were entered into soon after a mentally impaired beneficiary became a co-trustee at the bank’s suggestion.

Typically, a variable prepaid forward contract allows the investor who owns a stock to receive a significant portion of the current value of the stock up front, while agreeing to deliver a certain number of shares to the counterparty at a future date. The transaction may provide tax benefits to the investor, but can also involve high fees.

The court found the contracts were unsuitable for the trust and that they allowed the bank to profit from fees at the expense of the trust (“JPMorgan must pay $18 mln in trust mismanagement case,” by Suzanne Barlyn, Thomson Reuters).

In this case, the trust suffered substantial losses on the variable prepaid forward contracts sold to it by JPMorgan Chase. The court found that the bank failed to consult the beneficiaries of the trust about the purchase of these derivative contracts.

The court also found that JPMorgan Chase breached its fiduciary duty by investing the proceeds of the variable prepaid forward contracts in its proprietary products and charging fees for those transactions on top of its corporate trustee fees.
J. Boyd Page of Atlanta based Page Perry observed “variable prepaid forward transactions can be very dangerous for most investors. They are very complex, involve significant fee charges to investors, can have serious adverse tax implications, and can result in huge losses if not managed prudently.”

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.