Could Providence Lawsuit Against Wall Street Giants Save City Pension Fund?
Thursday, August 14, 2014
In April, the city filed a federal lawsuit against 40 Wall Street firms for alleged violations of U.S. Securities laws that netted them billions in illicit profits. Defendants are a who’s who of Wall Street, including the New York Stock Exchange, the Nasdaq Stock Exchange, Goldman Sachs, JP Morgan Chase, and Bank of America.
The next month, the city sued Santander—the $77 billion Boston-based successor to Sovereign Bank—over what it said was discriminatory mortgage lending practices that had affected minority neighborhoods in Providence.
Now the city is gearing up to sue General Motors, a city spokesman confirmed yesterday. The planned lawsuit stems from a nationwide recall of millions of vehicles over faulty ignitions. The city would be the first government entity to sue over the issue, The National Law Journal reported last week.
Providence has declared war on corporate wrongdoing in America.
“With these and other lawsuits, the Taveras administration has pursued affirmative litigation that holds Wall Street traders and corporate wrongdoers accountable since Mayor Taveras took office,” said city spokesman David Ortiz.
Wall Street settlement would shore up pension fund
The lawsuits also mean millions in potential settlements for a city that has had a recent all-too-close brush with bankruptcy and still has an ailing pension fund.
Damages sought in the lawsuits would be determined during the trial, Ortiz said, but the amounts of money involved run as high as nine figures. In the Wall Street lawsuit alone, the city says that over the course of five years it made transactions in securities worth $611 million. The funds invested were on behalf of the city pension fund, which had an unfunded liability of $831.5 million as of February.
Any winnings made from the lawsuit would go directly to the pension fund, Ortiz confirmed yesterday.
The suit is the latest in a series of nationwide legal challenges mounted by pension funds against financial institutions.
In 2006, the California Public Employees’ Retirement System, the largest state public pension system, won a $925.5 million settlement against United Health Group, Inc. in a lawsuit alleging that the managed care company had backdated stock options, according to an ABC News summary of the case. In 2009, the Louisiana state pension system won $750 million in a suit against the Xerox Corporation for allegedly misleading investors. Louisiana won another nine-figure settlement in another case in 2010 and two other similar cases had settlements in the billions, according to the ABC News tally.
“Providence is now following the lead of larger jurisdictions,” said city Councilman Luis Aponte, who noted that the series of lawsuits against such high-profile defendants is unusual for Providence.
The lawsuits also come as Providence Mayor Angel Taveras’ campaign for Governor has come into full swing. Also contending for the Democratic nomination is state Treasurer Gina Raimondo, whose background as venture capitalist and push for pension reform and investments in hedge funds have led her critics to portray her as a puppet of Wall Street.
“They’re clearly political ramifications to this,” said Ted Siedle a Forbes.com contributor who emerged as an outspoken critic of Raimondo’s investment policies last year.
Siedle noted that the illicit trading practices identified in Providence’s lawsuit would have affected the state—and to a much larger degree. “Your losses could easily be in the billions,” he said.
“Why has the city filed the lawsuit when the state has not?” Siedle said. “I believe the state for political reasons didn’t choose to pursue the litigation.”
The city lawsuit is about more that the city recovering its losses. It’s also about reform of Wall Street, according to Ortiz. “The City is seeking to reform the securities markets to ensure fairness for the retirees and employees invested in Providence’s pension fund, and for all institutional investors,” Ortiz said.
Officials at Nasdaq and JP Morgan Chase also declined comment. A spokesman for Bank of America did not respond to messages seeking comment.
Tobacco settlement could be a model
A firm representing the city in two of the three lawsuits—against the Wall Street traders and General Motors—is Motley Rice, the South Carolina-based law firm that led the 46-state lawsuit against tobacco companies, leading to the $246 billion tobacco settlement in 1998, the largest of its kind in U.S. history.
“What you’re now seeing is an adoption of that strategy at the local level,” said David Logan, the former dean and current professor at the Roger Williams School of Law.
The strategy, in part, relies in using strength in numbers to force larger corporations to take their legal challenges seriously. It also involves going after companies with the deep pockets to pay out a substantial settlement or court judgment, according to Logan. “This never would have been thought of 50 years ago,” Logan said. “Maybe even 25 years.”
Use of money from other settlements could be open-ended
It’s less clear where money from any future settlements from the suits against Santander and General Motors could go, but, at least in theory, there is nothing stopping the city from using the money to further shore up its pension fund.
That’s what two other Rhode Island cities did with some of the money they won from the Google settlement in a case that involved the illegal sale of prescription drugs. Out of $230 million that went to the state, East Providence and North Providence each received $60 million. North Providence used about a third of the money for its pension system. East Providence used nearly all of it. (Providence was not part of the Google case.)
Zurier said he believes any money the city wins in the cases should be used for the underlying problem that was at issue in the lawsuit. “The first thing you look to is what the wrong was that the lawsuit was designed to remedy. You try to use the money to address that,” Zurier said.
He contrasted that approach with what happened to the tobacco settlement, which, in Rhode Island went to balancing the state budget, Zurier said.
What Providence does with settlement money may also be restricted by the court. But if it isn’t and if there’s no reason to spend it on the underlying issue that generated the lawsuit, Zurier said the money becomes “available for the general purposes of the city.” He also envisioned circumstances in which any winnings in the pension case could be diverted to another pressing concern or emergency situation. His example: relief for a neighborhood that has been hit hard by a major fire.
Related Slideshow: Providence Sues Corporate Giants - See the Defendants and Charges
From defective ignitions to discriminatory mortgages, Providence is on a mission to expose corporate wrongdoing. Below are some of the defendants in a series of lawsuits and the allegations made by the city.
Lawsuit Date: Pending
Description: Providence plans to sue General Motors over defective ignition switches that its attorneys say have diminished the re-sale value of its fleet of vehicles. The lawsuit could be the first filed by a government entity against GM over the ignition problems, according to The National Law Journal. The planned lawsuit came to light in a July 28 court filing by law firm Motley Rice. A city spokesman said the lawsuit itself has yet to be filed.
Lawsuit Date: May 29, 2014
Description: “The lawsuit alleges that since 2009 Santander has deliberately reduced its lending in the city’s minority neighborhoods while actively expanding its business in predominantly white neighborhoods. Santander gained a substantial share of the city’s mortgage lending market in 2009 when it completed its purchase of Sovereign Bank.” - City of Providence press announcement
Wall Street Defendants
A lawsuit filed April 18 alleges fraudulent trading and other violations of federal securities laws by a number of Wall Street companies. Defendants include: the New York Stock Exchange, Nasdaq Stock Market, Bank of America, Barclays, Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Charles Schwab.
Wall Street Wrongdoing
“This case arises out of a scheme and wrongful course of business whereby the Exchange Defendants, together with a defendant class of the brokerage firms entrusted to fairly and honestly transact the purchase and sale of securities on behalf of their clients (the “Brokerage Firm Defendants”) and a defendant class of sophisticated high frequency trading (or “HFT”) firms (the “HFT Defendants”) employed devices, contrivances, manipulations and artifices to defraud in a manner that was designed to and did manipulate the U.S. securities markets and the trading of equities on those markets, diverting billions of dollars annually from buyers and sellers of securities to themselves.” – Complaint filed in U.S. District Court, Southern District of New York, April 18, 2014
The defendants engaged in two forms of kickbacks, the lawsuit alleges.
Electronic front-running: “in exchange for kickback payments, the HFT [High Frequency Trader] Defendants are provided early notice of investors’ intentions to transact by being shown initial bids and offers placed on exchanges and other trading venues by their brokers, and then race those bona fide securities investors to the other securities exchanges, transact in the desired securities at better prices, and then go back and transact with the unwitting initial investors to the their financial detriment”
Rebate arbitrage: “where the HFT and Brokerage Firm Defendants obtain kickback payments from the securities exchanges without providing the liquidity that the kickback scheme was purportedly designed to entice”
The lawsuit alleges that the Wall Street firms have made billions in illicit profits by a scheme called “slow-market arbitrage” in which some traders are shown changes in the price of a stock on one exchange, and pick off orders sitting on other exchanges, before those exchanges are able to react and replace their own bid/offer quotes accordingly.” The lawsuit states that the “practices are repeated to generate billions of dollars more a year in illicit profits than front-running and rebate arbitrage combined.”
Spoofing the Market
Another deceptive and manipulative practice is known as “spoofing,” in which high-frequency traders “send out orders with corresponding cancellations, often at the opening or closing of the stock market, in order to manipulate the market price of a security and/or induce a particular market reaction,” according to the complaint.
Another violation involves “laying” in which high-frequency traders “send out waves of false orders intended to give the impression that the market for shares of a particular security at that moment is deep in order to take advantage of the market’s reaction to the layering of orders,” the complaint states.
“In an effort to enrich themselves through these manipulative tactics, illicit kickback payments, and insider trading proceeds, Defendants wrongfully misappropriated material non-public information about Plaintiff’s and the Plaintiff Class’s further intentions to trade (both as to amount and price), tipped one another as to those intentions, and otherwise distorted and manipulated the pricing of their securities in violation of §10(b) of the Exchange Act and Rule 10b-5. All Defendants are sued as primary participants in the wrongful and illegal conduct and scheme charged herein, as each engaged in the manipulative acts and deceptive practices detailed herein.” – first count in April 18 complaint
$611M Securities Trades
In federal court filings, Providence identified millions of shares worth hundreds of millions of dollars that had been affected by illegal trading practices. Below is a breakdown:
Period under Scrutiny: 2009 to 2014
Total Shares: 26 million (securities transactions)
Total Dollar Value of Shares: $611 million
Source: Providence’s Plaintiff Declaration, April 18, 2014
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