Could Providence Lawsuit Against Wall Street Giants Save City Pension Fund?
Thursday, August 14, 2014
From one of the world’s largest automakers to its largest stock market, Providence is taking some of the most iconic institutions of corporate America to court in a series of lawsuits that could net the city millions in winnings.
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.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTNow 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.
“If we hit the jackpot in one of them, I think that would be great,” said city Councilman Sam Zurier.
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.
State losses could be in the ‘billions’
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.
GoLocalProv reached out to several of the Wall Street companies targeted in the lawsuit. All declined comment. “We generally don’t comment on legal issues,” said Brookly McLaughlin, spokeswoman for the New York Stock Exchange.
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.”
Motley Rice, which also has an office in Providence, also was the firm that handled the lead paint lawsuit for the state of Rhode Island. The firm is one of three leading the class action against the Wall Street companies. (The two others are Robbins Geller Rudman and Dowd LLP, Motley Rice LLC and Labaton Sucharow LLP.) Motley Rice is also representing the city in the pending action against General Motors, according to The National Law Journal.
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.
Stephen Beale can be reached at [email protected]. Follow him on Twitter @bealenews
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.
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