Cities Beware of New Securities Legislation

By Weiler, Laura | Nation's Cities Weekly, August 11, 1997 | Go to article overview

Cities Beware of New Securities Legislation


Weiler, Laura, Nation's Cities Weekly


Reps. Anna Eshoo (D-CA) and Rick White (R-Wa) have recently introduced new legislation in the House of Representative that will further limit the ability of cities and towns to seek financial relief should they find themselves the victims of investment fraud. H.R. 1689, the Securities Litigation Uniform Standards Act, follows a 1995 law, passed over a presidential veto, that placed obstacles in the way of access to federal courts. The new bill, if it is passed, would eliminate the possibility of filing in state courts should a case fail to meet the new standards for federal litigation.

While some cities and towns may not be forced to deal with the effects of investment fraud on a day to day basis, it is nonetheless important for them to keep informed about this issue and to campaign actively against the passage of the Uniform Standards Act. Many cities and towns participate in the securities market by investing money from public funds based on the advice of such companies as Merill Lynch, and should thy fall victim to fraud, it is of utmost importance for the health of the city to have a way to recover the financial losses.

Painesville, Ohio, which has a population of 15,699, recently lost $6.4 million in the investment market after, they claim, their broker sold them securities which he knew were unsuitable for municipalities. In May of 1996, the city filed a lawsuit against First Montauk Investment COrp., the New Jersey company that originally sold the city's broker the interest-only securities that resulted in Painesville's financial loss. In the lawsuit, Painesville charges that that the company knew both the securities would be sold to a city and that they were inappropriate for such an investor. Further, the city was not warned by First Montauk that such investments would be unstable and risky. This case is still ongoing.

When the 1995 Private Securities Litigation Reform Act (PSLRA) was passed, it was intended to reduce the amount of frivolous cases filed against investment advisors and high-tech companies. However, it has also had the effect of barring many valid claims against fraudulent actions in federal courts. Under current law, many victims of fraud have the option of turning to state courts for restitution should the PSLRA keep them from filing at the high-tech and investment companies have been pushing for a new law that will eliminate this last opportunity by pre-empting state laws in this area. Should the Uniform Standards bill pass, it would preemp state laws that provide for liability for aiders and abettors of wrongdoers, longer and more realistic statutes of limitations, and joint and several liability, all of which are areas that cities no longer have recourse for at the federal level on behalf of their pension funds or invested city cash.

On December 6, 1994, Orange County, California, which had invested money from 187 cities, school districts, and public agencies, was forced to file for bankruptcy after their investments failed and resulted in a $2 billion loss. Orange County is one of the largest and wealthiest counties in the country, and its bankruptcy caused a freeze on city funds. This jeopardized pensions and payrolls for city employees as well as scheduled projects such as the construction of schools and the expansion of the Anaheim stadium, a project intended to keep the Los Angeles Rams from moving.

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