Christ Church Cathedral in Indiana is suing JPMorgan Chase & Co. (JPM) According to church leaders, the bank made inappropriate recommendations, causing $13 million in losses. They’re accusing JPMorgan of advising that the church invest in proprietary funds that were underperforming.
The church filed its securities fraud lawsuit in the U.S. District Court in Indianapolis. According to the complaint, the firm inappropriately guided the church into 177 investment products that gave the firm high revenues. InvestmentNews reports that the church said the proprietary products made up at least 68% of its investment portfolio.
The plaintiff contends that the private equity and hedge funds, cash sweep accounts, managed accounts, and mutual funds it invested in between 2004 and 2013 were bound to perform poorly, especially with all the associated fees and expenses. The church said that last year, its assets declined from $31.6 million to $19.2 million, while JPMorgan made millions from cross-selling investment products.
The Episcopalian institution is accusing the bank of breaching its fiduciary duty. It wants compensatory and punitive damages.
The U.S. Securities and Exchange Commission recently started looking into possible conflicts of interest involving JPMorgan and the firm’s sale of certain investments to individual clients. This inquiry is reportedly not public. The Wall Street Journal reported that the Office of the Comptroller of the Currency had been conducting a similar probe of the firm. The newspaper says that this investigation was one of the reasons the bank modified the way it discloses to investors the difference between outside offerings and its products. JPMorgan also now notifies them regarding how much of their monies are in each.
In May, the bank said in a disclosure to clients that it prefers its own funds unless they believe that third-party managers can provide portfolio construction benefits that are “substantially differentiated.” The document was reviewed by The WSJ. The firm admitted that the bank gets “more overall fees” when internal strategies are used. Private bank employees are notified about “investment priorities” that the firm would like to sell.
Banks can take in more of the fees if clients invest in their own products. Sometimes, offering their own investment vehicles allows them to provide performance that is better than average. Doing so can also be less costly for customers.
Amid SEC probe, church sues J.P. Morgan over asset mismanagement, Fortune.com, August 13, 2014
J.P. Morgan Faces More Questions on Conflicts of Interest, The Wall Street Journal, August 8, 2014
JPMorgan’s fund choices for its clients said to be under regulatory review, InvestmentNews, August 11, 2014
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