Two U.S. churches' allegations of self- dealing by JPMorgan Chase & Co. expose an area inside the largest U.S. bank that is rich in potential for conflicting interests — a trust business that invests in the bank's own products.

JPMorgan, entrusted to manage funds to support the churches' good works, put its own financial interests first, the churches say. Their claims came after other religious orders pressed the bank for a report on its business standards, prompting it to release nearly 100 pages last month describing its efforts to bolster ethics and compliance.

Christ Church Cathedral of Indianapolis said JPMorgan breached its duty as trustee by investing the church's $31 million trust largely in products that generated revenue for the bank, with fees in some cases exceeding 8 percent a year. The bank invested in these and other "toxic" products of its own creation, the church alleged in an August lawsuit, resulting in a "surreptitious transfer of wealth from the Christ Church trusts to JPMorgan."

Such decisions cost the trust $13 million over nine and a half years, the church suit said. Declining assets and income from the trust, founded by pharmaceuticals scion Eli Lilly in the 1970s, forced the church to pare its HIV, hunger and domestic-abuse programs, said the Very Reverend Stephen Carlsen.

"Legal action is the last resort," said Carlsen. "This is not a class they teach in seminary."

The Sandscrest Foundation, which benefits the Episcopal Diocese of West Virginia, made similar allegations in a suit filed in March. An Illinois library, in a previously unreported letter to the bank, also raised concerns that the bank may have put its own financial interests first.

Other parts of JPMorgan have already come under scrutiny for steering clients to in-house investments. The church suits touch upon a little-examined facet of JPMorgan's operations, the pairing of trust services and fund management that holds the possibility for both revenue growth and self-dealing.

New York-based JPMorgan denied wrongdoing in connection with its trust business. The bank stepped down as Christ Church Cathedral's trustee a year ago. In an October court filing, it sought to dismiss the suit, saying the church didn't have the standing to file a securities claim in part because it didn't buy or sell securities, and that the allegations weren't specific enough.

"The church is painting a grossly inaccurate picture of how the trust was managed, cherry-picking funds that did not perform well and failing to mention multiple funds that performed very well," said a bank spokeswoman, Kristen Chambers.

Like other big banks, JPMorgan is bolstering its profitable asset-management business, which includes trusts, at a time when new regulations are squeezing other pieces of the business.

Unlike several rivals, JPMorgan is also expanding its mutual fund business, broadening the in-house investments from which trust managers can choose. Over the past decade, Morgan Stanley, Citigroup Inc. and Bank of America Corp. have shed such fund businesses after being fined for allowing conflicts of interest to result in sales abuses.

With trusts in general, the potential for conflicting interests is high. By design, trusts take investment decisions out of beneficiaries' hands and give trustees a rare degree of authority to oversee assets as they see fit, guided by trust terms and state law. Trust managers' prime fiduciary duty is to put beneficiaries' interests first.

For trustees that offer money-management services, the critical question is whether they are fulfilling that duty when steering assets toward in-house investments, said Charles Ranson, an expert witness in trust and estate litigation in Ocean Ridge, Florida, who spoke generally about trusts.

"Would a group of certified financial analysts agree this was a pretty prudent investment and it's too bad it didn't work out? That's OK," said Ranson, who previously worked for three decades at financial institutions, including as head of Chase Manhattan Private Bank in Florida. "But if the trustees jammed a bunch of their own products into the trust and said 'Next!' — that's not acceptable."

JPMorgan said it has established robust governance and controls around these accounts. "As trustee for client assets, we take our fiduciary responsibility seriously," said Chambers.

On Dec. 19 — following tens of billions of dollars in regulatory and legal fines, and a push for transparency at the bank led by the New Jersey-based Sisters of Charity of Saint Elizabeth — JPMorgan released "How We Do Business," profiling its efforts to strengthen operating standards, internal controls and governance. The bank's asset-management unit recently created an "enhanced conflicts of interest framework" to identify and assess potential issues, the document said. It said the unit has trained over 700 of its people to assess conflicts.

One asset-management conflict that proved costly for the bank came two years ago. The American Arbitration Association determined that JPMorgan had "stacked the cards" by giving its employees incentives to favor it own funds in retirement accounts. Arbitrators ordered JPMorgan to pay $373 million plus interest to American Century Investment Management Inc. of Kansas City, Missouri, which lodged the complaint.

Separately, the Securities and Exchange Commission was reviewing whether JPMorgan was motivated by self-interest in selling its own investment products to private-investment clients, Bloomberg News reported in August, citing a person familiar with the situation.

The SEC declined to comment on whether it is looking into the allegations in the church suits.

JPMorgan Asset Management, a division that handles funds and trusts, managed a record $2.3 trillion in client assets at the end of 2013. Its 22 percent return on equity in the first half was the highest among JPMorgan's four largest divisions.

Funds have been a growth driver: Assets in JPMorgan's U.S.- traded open-ended and exchange-traded funds grew fivefold in the six years through December 2014 to $263 billion, according to data compiled by fund-tracker Morningstar Inc. in Chicago. That has turned JPMorgan into the No. 7 mutual-fund provider in the U.S. and the only bank in the top 10.

The growth has come despite mid-tier performance for the JPMorgan mutual funds available to U.S. investors. Over the decade through 2013, these funds have ranked in the 47th percentile after fees, or three percentage points above the mean, in Morningstar's system. Fees for actively-managed mutual funds are 24 percent above the industry average, measured on an asset-weighted basis, the fund tracker says.

JPMorgan, in a disclosure statement it says it provides to trusts and other private clients, says it selects funds from among in-house and outside products based on rigorous reviews.

"We prefer internally managed strategies because they generally align well with our forward looking views and our familiarity with the investment process, as well as the risk and compliance philosophy that comes from being part of the same firm," the statement said.

The disclosure added: "J.P. Morgan Chase receives more overall fees when internally managed strategies are included."

One of those internally managed vehicles was the short- lived Highbridge Dynamic Commodities Strategy Fund, part of the JPMorgan-owned Highbridge Capital Management. The fund opened in 2010 and reached peak assets of $2.7 billion the next year, according to Morningstar. Investors then pulled out, leaving the fund with $91 million in assets in January 2014, according to Morningstar figures.

Bank trustees picked the commodities fund for both churches, as well as for a $24 million trust to benefit the Parlin-Ingersoll Public Library in Canton, Illinois.

The fund had no performance history and Morningstar's lowest rating when JPMorgan trustees put about $750,000 from the library trust there, according to an October 2013 letter to the bank from the library's director, Kimberly Bunner. JPMorgan appears to have sold the stake in March 2013 at a loss of $254,000, the letter said.

The Highbridge fund lost 17 percent cumulatively over its lifetime and closed in February 2014, according to Morningstar.

Overall, Bunner wrote, JPMorgan put $7 million of the library trust, or about 30 percent, into its own funds.

"You are bound by your duty of loyalty to the trust beneficiaries," she warned in the letter, which was attached to the Christ Church suit. "You should avoid placing yourself in a position of conflict."

In a response to Bunner, the bank wrote that its officials added alternative investments because research showed that equity and fixed-income investments alone wouldn't be enough to meet the foundation's return requirements. The bank waived sales commissions and certain other fees, it added.

Bunner and members of her library's board declined to comment.

JPMorgan declined to comment on the commodities fund and on a Dec. 5 report in Institutional Investor that said managers at Highbridge are in talks to buy the firm back from the bank.

The Christ Church Cathedral trust ended up in JPMorgan's hands not by its benefactor's design but by merger, a reminder of big banks' broadening influence in America's financial life.

Lilly, whose grandfather founded Eli Lilly & Co., left money to benefit the historic Indianapolis cathedral following his death in 1977. He said the funds should be divided into three shares, each managed in trust by a different local bank.

At the time, commercial banks were barred from acting as investment banks or securities brokers. The three Indianapolis banks put the trust's money in stocks, bonds and mutual funds — "transparent, liquid, risk-averse investments with reasonable trustee fees and costs," according to the church's suit, filed in U.S. District Court for the Southern District of Indiana.

After 1999's lifting of several Glass-Steagall Act restrictions, commercial banks expanded. JPMorgan, through mergers culminating in its 2004 acquisition of Bank One, became trustee for portions of the church trust originally managed by Indiana National Bank and American Fletcher National Bank and Trust.

In 2006, church investment committee members told JPMorgan officials they wanted it to hire independent money managers who could be terminated if their performance disappointed, the suit says. JPMorgan declined, responding that it owned and exclusively managed the trust, the suit adds.

The next year, JPMorgan executives told the church they intended to begin using alternative investments, including derivatives and hedge funds. In 2013, the church suit says, JPMorgan owned or had financial interests in 68 percent to 85 percent of the trust's investments.

Among the roughly 180 products that JPMorgan bankers chose for the trust were nearly 90 structured notes — investments linked to underlying stock indexes, currencies and other assets. JPMorgan acted as the placement agent for each, according to the suit.

The bank and the notes' issuers may have charged fees of up to 11 percent of their value during the time they were in the trust, the suit says. The church's return on the notes, after fees, averaged 1.4 percent annually over six years through December 2013, it adds. By comparison, the Vanguard Total Bond Market Fund's institutional shares yielded 4.5 percent annually, with current fees of 0.07 percent a year.

Other investments identified in the church's suit include JPMorgan Blackstone Partners Offshore Fund Ltd., a "fund of fund of funds" with three layers of fees that together may have exceeded 8 percent. Another was the JPM Och-Ziff Feeder Fund in which the bank received up to half of the management fees and 20 percent of performance-based fees from the investors it introduced. The Chilton Global Natural Resources II fund, for which JPMorgan is a prime broker and is listed as receiving fees for placing assets, management, clearing, settlement and custodial services, resulted in a $201,000, or 33 percent, loss to the trust after fees, the church said in the suit.

Overall, the church's suit said, JPMorgan's annual management fee nearly quadrupled, to $177,000, between July 2004, when it took over as trustee, and the end of 2013. Those disclosed fees are "insignificant in comparison" to what the church said it paid in hidden fees for investments in which the trustee had a financial interest.

Over the same nine and a half years through 2013, the trust's value fell to $31.6 million from $34.6 million, according to the suit. The church received annual distributions of 5 percent to 6 percent during that time.

Over the same period, the S&P 500 Index rose 64% and the BofA Merrill Lynch US Corporate & Government Index of bonds had a total return of 55%.

JPMorgan said the suit was "meritless" and denied that the cathedral's investments have performed poorly.

"Even though the trusts distributed more than $13 million to the church between 2006 and 2013, the trusts still gained well over $10 million" during the period that included one of the worst financial crises in U.S. history, the bank wrote in a filing.

JPMorgan voluntarily resigned as trustee in December 2013. The suit said another bank, which the church didn't name as a defendant in its suit, also stepped down. The church is seeking unspecified compensatory, punitive and statutory damages, as well as interest and legal fees.

The suit filed by the Sandscrest Foundation, a nonprofit group established in the early 1950s in West Virginia, said JPMorgan breached its duty of loyalty and engaged in self- dealing in "making investments in proprietary investment pools and proprietary funds."

The $3 million trust was originally managed by Security Trust Company in West Virginia, which was succeeded by JPMorgan.

Church officials, who filed their suit in Ohio County, West Virginia, circuit court, declined to comment.

Chambers, the JPMorgan spokeswoman, said the suit was unfounded and that the bank has denied all allegations regarding the use of JPMorgan products in the trust. In legal filings, the bank also said the foundation lacked standing to sue because it isn't the trust's principal beneficiary. In addition to helping fund the Episcopal Diocese of West Virginia, the foundation benefits a medical center, a Boy Scout troop and a soup kitchen.

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