18 Brokerages to Pay $140 Million : Settlement OKd in Baldwin Case

A federal judge Wednesday approved a $140-million settlement between 18 brokerage firms and thousands of customers who bought Baldwin-United Corp. annuities before the company collapsed.

Brushing aside objections from 48 policyholders and officials from more than 20 state governments, U.S. District Judge Charles L. Brieant Jr. called the settlement “beneficial, fair and reasonable” considering the risk for plaintiffs of taking the case to trial.

Unless overturned on appeal, the settlement will terminate class-action lawsuits filed on behalf of nearly 100,000 brokerage customers, many of them retired or approaching retirement age. They charged that the brokers falsely portrayed Baldwin-United policies as a very safe, high-yielding investment.

Eight other brokerage firms that sold the annuities did not join in the settlement, and litigation on behalf of their estimated 24,000 customers continues. In addition, 40,000 Baldwin policyholders who bought the annuities from independent life insurance agents are not affected by the settlement.

Before seeking reorganization under federal bankruptcy law in 1983, Baldwin-United was one of the nation’s largest issuers of “single-premium deferred annuities.” For one initial payment--typically $20,000--customers were promised interest rates averaging 14% percent for the first year of the contract and were guaranteed a minimum of 7.5% a year for 10 years. In addition, the interest was to be tax-free until the investor began receiving payments from the policy, generally at retirement age.

Two Baldwin subsidiaries issued $4.2 billion of the policies to 163,000 investors nationwide before the company failed in 1983, in large part because Baldwin invested most of those initial payments in several of its own unprofitable operations.

The amount that Baldwin customers will receive and the timing of any reimbursement remain unsettled. Lawyers for the annuity holders, the brokers, the insurance industry and Baldwin-United’s bankruptcy trustee have been trying to put together a $450-million “enhancement plan” that would give investors the 7.5% yield they were promised when they bought the policies, and then refund their money in late 1987.

If the enhancement plan is created, the $140 million will represent the brokers’ contribution to the $450-million fund. Without the enhancement plan all Baldwin customers, settling and non-settling, will receive an estimated 5.5% until 1987, but the 100,000 covered by the settlement would receive an additional, immediate payment representing their share of the $140 million.

The deadline for creating the enhancement plan is May 15, but several extensions have been granted and Brieant, sitting in U.S. District Court in Manhattan, said more are possible.

Opponents of the settlement said it is a bad deal for the plaintiffs. By going to trial and arguing that the brokers violated federal securities laws and state consumer protection statutes, they said, annuity holders would fare better.

But Brieant noted that the brokers’ argument that state insurance regulators have vouched for Baldwin-United’s soundness and that only 323 plaintiffs out of the more than 99,000 covered have opted out of the settlement in favor of pursuing their own suits.

“The plaintiffs . . . and their intelligent and profit-minded lawyers have in effect voted with their feet,” he wrote. “Are they all wrong?”

Brieant’s order blocks state officials from bringing their own suits on behalf of the 18 brokers’ customers. In every state except New York, Brieant noted, state insurance regulators had approved the sale of Baldwin-United policies, and those regulators “uttered comforting bromides almost to the end.”

“All participants in the Baldwin-United debacle have shown that the emperors of state insurance regulation had no clothes,” the judge wrote. “That they or some of them should seek a scapegoat is hardly surprising.”

Peter Brann, an assistant state attorney general in Maine who led the states’ efforts to block the settlement, said he could not comment until he had studied the decision.

The settling brokers and the approximate amount of their contributions are: Advest Inc., $529,000; A. G. Edwards & Sons, $11.9 million; Bateman Eichler, Hill Richards, $431,000; Blunt Ellis & Loewi, $4.4 million; Boenning & Scattergood, $37,500; Drexel Burnham Lambert, $1.3 million.

E. F. Hutton, $34 million; Herzfeld & Stern, $55,000; Janney Montgomery Scott, $1.4 million; Kidder, Peabody & Co., $7.1 million; Merrill Lynch & Co., $44.2 million; Moseley, Hallgarten, Estabrook & Weeden, $1.3 million; Oppenheimer & Co., $685,000; Parker-Hunter Inc., $30,000; Prudential-Bache Securities, $18.6 million; Smith Barney, Harris Upham, $9.5 million; Thomson McKinnon Securities, $4.1 million; and Tucker, Anthony & R. L. Day, $472,000.