CHICAGO (CN) – A married couple claims J.P. Morgan Chase Bank’s “self dealing” cost them $1.5 million when its advisers ignored their request for a safe and liquid portfolio and put their money into a risky hedge fund so the bank could collect “fees upon top of fees upon top of fees.”
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Jeffrey and Shelli McDonald sued JP Morgan Chase Bank its investment advisers Erin Ohlms and John Perry, in Cook County Court.
The McDonalds says they sold their Texas-based baking company for $6.5 million in 2005 and hired JP Morgan for advice.
They claim that Perry “courted” them for months, during which they “consistently reiterated their desire for safe and liquid investments and Perry indicated that he understood those needs.”
The claim Perry told them “that all of the McDonald’s investment needs could be met through an investment vehicle called the J.P. Morgan Global Access Portfolio” or JPM GAP.
After turning over their money, Jeffrey McDonald says, he told Perry that he was putting too much money – 14 percent of it – into hedge funds, and put too much money in stocks.
“Unbeknownst to the McDonalds at the time, the reason that the Strategic Asset
Allocation Guidelines did not match what they had previously discussed with Perry is that the guidelines were not meant to match the McDonalds’ stated objectives and risk tolerance, as represented, but rather JP Morgan’s desire to sell the McDonalds the JPM GAP Fund,” the complaint states. “Specifically, the asset allocations listed in the Strategic Asset Allocation Guidelines matched almost exactly the asset allocations in the JPM GAP Fund. That was not a coincidence.”
The complaint continues: “When the McDonalds began to waiver on investing with JP Morgan and in the allocation JP Morgan wanted, Perry brought in another investment advisor to help push the JPM GAP agenda. Specifically, shortly after the signing of the new account documents and the McDonalds expressing their concerns, Perry introduced the McDonalds to Defendant Erin Ohlms. Perry represented that Ohlms was another investment adviser who would be working on the McDonalds’ accounts. Ohlms was a Director of JP Morgan at the time and worked in their Chicago office.
“Almost immediately, Ohlms, along with Perry’s help, further pushed on the McDonalds to invest more heavily in the stock market than they wanted. Additionally, Ohlms and Perry continued to push the McDonalds into agreeing to invest in a higher percentage of hedge funds, With the benefit [of] hindsight, it is now clear that Ohlms’s and Perry’s push was really a push towards investing in the vehicle that JP Morgan had already decided it wanted to purchase for the McDonalds – regardless of the investment needs of the McDonalds – the JPM GAP Fund.
“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 McDonalds add: “Despite both written and verbal statements that the money was to be invested in safe and liquid investments, Perry and Ohlms 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.”
Neither Perry nor Ohlms told the McDonalds that “the fund had significant liquidity restrictions,” the complaint states. “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 to the McDonalds, they would not have had any interest in the JPM Gap Fund.
“However, none of the above information was disclosed to the McDonalds.”
The McDonalds became alarmed as their portfolio lost value in 2008, and wanted to liquidate their investments. “At that time, Ohlms disclosed to the McDonalds for the first time that the investments selected for them were illiquid and could not be easily sold,” the complaint states.
The McDonalds add: “The JPM GAP Fund was finally sold at the end of 2008 or early 2009, months after the McDonalds sought liquidity. Even then, the JPM GAP Fund did not distribute any money until February 2009 and did not fully liquidate and send the final cash the McDonalds invested in the fund until the summer of 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.”
The McDonalds seek punitive damages for breach of contract, breach of fiduciary duty, negligence, violations of the Indiana Uniform Securities Act, and fraudulent misrepresentation.
They are represented by Robert Crowe with the Stoltman Law Offices.