In 2005, an Indiana couple sold their baking business for a nice sum of $6.5 million and turned to JPMorgan Chase to place that money in “safe and liquid investments.” But the investors say Chase deliberately ignored their wishes and put the millions into high-risk investments that also padded the bank’s coffers with “fees upon top of fees upon top of fees.”
In a lawsuit filed earlier this month in Cook County, IL, the couple accuse Chase of “self dealing” by disregarding their wishes and placing their money into a risky hedge fund, on which they paid a 1.5% fee, which included other Chase funds, each of which earned the bank a separate fee.
The couple say that before they invested the money, they made it clear to Chase that they wanted their cash put into low-risk investments that could be cashed out quickly if needed. The Chase adviser they dealt with allegedly told them all of their “investment needs could be met through an investment vehicle called the J.P. Morgan Global Access Portfolio [JPM GAP].”
Almost immediately, the couple told the bank it was putting too much of their money into hedge funds and stocks.
The suit states that “the reason that the Strategic Asset Allocation Guidelines did not match what [the couple] had previously discussed with [Chase] is that the guidelines were not meant to match the [the couple's] stated objectives and risk tolerance, as represented, but rather JP Morgan’s desire to sell… the JPM GAP Fund.”
From the suit:
The JPM GAP Fund is a hedge fund sponsored and owned by JP Morgan and its affiliates. … [It] is an investment vehicle that is very profitable for JP Morgan as it layers fees upon top of fees upon top of fees, most of which are hidden from JP Morgan’s clients. For example, an investor who purchases an interest in the JPM GAP Fund typically pays a 1.5 percent annual fee to the fund, which JP Morgan collects. However, as the JPM GAP Fund is largely comprised of other JP Morgan mutual funds, JP Morgan collects further fees (also usually in the 1.5 percent range) for all of the mutual funds purchases.
The bank attempted to quell the couple’s concerns by bringing in a second adviser, who was supposed to help the situation but who, per the lawsuit, “further pushed on the [couple] to invest more heavily in the stock market than they wanted.”
The two Chase staffers also worked to convince the couple to put a higher percentage of their money into hedge funds.
Again, from the complaint:
Despite both written and verbal statements that the money was to be invested in safe and liquid investments, [the two advisers] placed almost all of the money entrusted to them in this single, illiquid, proprietary fund … even though Jeff McDonald had specifically stated that even 14 percent in a hedge fund was too much.
The plaintiffs claim they were never told that the fund had significant liquidity restrictions: “Specifically, the fund was required to be held for one year or the purchaser would be forced to pay a penalty to recover their money… Additionally, even after that first year, the JPM GAP Fund would only allow liquidations on a quarterly basis, with an additional required 30 day notice. Had any of the above information been disclosed… they would not have had any interest in the JPM Gap Fund.”
The couple didn’t find out any of this until 2008 when, like many people, their investment portfolio took a turn for the worse. They claim this was the first time they were told “that the investments selected for them were illiquid and could not be easily sold,” the complaint states.”
By late 2008/early 2009, the couple were finally able to get out of the fund, but they did not receive the final cash payment until July 2009.
“Ultimately, in a very short time period, through misrepresentations and omissions, breaches of contract and fiduciary as well as extraordinary self-dealing, defendants lost over $1.5 million of the money entrusted to them,” reads the complaint.