Investors Urged to Reject Settlement by Prudential : Finance: The deadine nears in a class-action suit over losses on allegedly secure investments.
Prudential Securities is hoping that, by the end of the week, tens of thousands of investors take what a growing number of lawyers and independent analysts say is looking increasingly like a terrible deal.
Friday is the deadline for 128,000 investors who lost $1.44 billion in Prudential oil and gas limited partnerships to opt out of a class-action settlement that would pay them just pennies on the dollar.
Prudential, whose motto is “Rock Solid, Market Wise,” offered the partnerships as safe investments for retirees and people saving for their children’s college educations. The market value of the investments--allegedly touted as secure alternatives to bank certificates of deposit--is now zero.
The vast majority of the investors, including several thousand in California, are expected to take the settlement. Investors will automatically be bound by the agreement unless they send letters rejecting it.
But many experts say the settlement appears to heavily favor Prudential and about 16 class-action lawyers who stand to collect up to $25 million in fees.
Investors’ lawyers point out a striking disparity between the tiny returns provided by the settlement and what other investors--in exactly the same circumstances--have collected by filing individual arbitration cases against Prudential.
Some of these investors have recouped the full amount of their losses plus interest--and, in at least one recent case, a large sum in punitive damages as well.
As a result, many lawyers who specialize in representing investors are advising clients to opt out.
The proposed arrangement “is about the worst settlement I’ve ever seen in 27 years in the field,” said Austin, Tex., attorney Stuart C. Goldberg.
Prudential spokesman William Ahearn contends the class-action settlement “is well rounded, fair for all the parties involved.” It faces final review and approval by U.S. District Judge Marcel Livaudais Jr. in a New Orleans hearing scheduled for Feb. 9.
New York lawyer Edward A. Grossman, the lead attorney for the class-action plaintiffs, argues that most investors will be better off participating in the settlement because they will get some money back without having to find a lawyer or file an individual complaint.
The settlement is fair, he contends, given the legal hurdles the class action could face if it went to trial, including the possibility that some claims would be barred as not having been filed early enough. And he rejected charges that the legal fees to be requested by the class-action lawyers--25% of the total settlement--are excessive.
In the 1980s, Prudential (then known as Prudential-Bache) aggressively marketed limited partnerships in a range of enterprises--from oil and gas to real estate to research and development projects--targeting retirees and other small investors. The investors poured in an estimated $6 billion, bringing big commissions to Prudential and the brokers who sold them--higher than those on the sale of ordinary stocks and bonds.
But most of the partnerships now are worth no more than a small fraction of the original investment.
That easily makes Prudential’s limited partnerships one of the biggest investment disasters of the 1980s--much larger, for example, than the $285 million that small investors lost buying American Continental Corp. bonds in the Lincoln Savings & Loan debacle.
The disputed settlement involves 35 Prudential oil and gas limited partnerships known collectively as the “Energy Income Funds.”
Aggressive probing by lawyers for individual investors in the funds turned up documents that appear to show fraud by Prudential in marketing the partnerships and wrongdoing by a Louisiana firm, Graham Securities, partly owned by Prudential. Graham and its parent company, Graham Royalty, managed and helped market the partnerships.
In September, the National Assn. of Securities Dealers expelled and censured Graham Securities, ordering it to pay over $5 million in fines and settlements.
The NASD charged that Graham gave Prudential brokers false information to use in selling the partnerships, allegedly sent out misleading brochures to investors and failed to disclose an apparent conflict of interest involving Graham executives and a Houston bank that did business with the partnerships.
Graham Securities agreed to the punishment without admitting guilt and continues to deny some of the charges.
Prudential itself currently is the subject of disciplinary investigations by the Securities and Exchange Commission and the NASD for its role in marketing the partnerships. Michael A. Hanzman, a Florida lawyer who won a big arbitration case against Prudential, said he recently was visited by agents from the Federal Bureau of Investigation asking about the Prudential partnerships.
Prudential declined to comment on any of the pending investigations.
The firm contends the partnerships declined in value because of the unforeseen drop in oil and gas prices in the mid-1980s.
But many lawyers who have analyzed the partnerships said they were required to pay so much in management and other fees that the investments stood little chance of ever producing real profits. And investors have charged repeatedly that Prudential’s sales force hid the risks, in violation of securities regulations.
One 1987 instruction book tells Prudential brokers “to sell safety and security” in marketing limited partnerships. It shows a cartoon of a broker telling an anxious-looking customer, “See how safe this investment is? You can feel confident and relaxed.”
In addition, documents obtained by Hanzman’s law firm, Zack, Hanzman, Ponce & Tucker, include internal memos showing that the brokerage’s parent company, Prudential Insurance, had stopped investing in the oil and gas partnerships and had expressed strong doubts about their prospects at the same time Prudential-Bache was continuing to aggressively market them to small investors as safe.
The settlement pending in federal court follows a model that has resolved complaints about other Prudential limited partnerships. Hardwick Simmons, chief executive of Prudential Securities, has set a mid-year deadline for resolving all of the related disputes.
The results of a series of arbitration cases, however, show that investors stand at least a chance to recover much more of their losses:
* Richard A. Davis, a Florida man with an eighth-grade education, collected a windfall after discovering a new method for attaching siding to buildings. With little experience as an investor, Davis turned virtually all of his profits over to Prudential, with instructions that he wanted it “safely” invested.
A Prudential broker allegedly disregarded the instructions, putting nearly all of Davis’ money into the highly speculative limited partnerships.
Last month, in the case handled by Hanzman, an arbitration panel awarded Davis $484,000 in compensatory damages, including all of the $149,633 he invested in an Energy Income Funds partnership, plus $300,000 in punitive damages. “We obviously disagree and are disappointed by the ruling,” said Prudential spokesman Ahearn. But the firm plans no appeal.
* Last April, in a case handled by Texas lawyer Goldberg, arbitrators awarded three Oklahoma retirees $982,247--the full amount of their losses from investments in a series of Prudential partnerships that included the Energy Income Funds.
* An arbitration panel awarded $1,007,000 to Margaret F. Coke, a Texas widow with two children, including the full amount of her investment in Energy Income and other Prudential partnerships.
After Coke’s husband--a pilot in the Marine Corps Reserve--died in a helicopter crash, she invested the proceeds of his life insurance and his Marine Corps death benefits with a Prudential broker. The broker persuaded her to put most of the money into limited partnerships.
In addition to a series of big reported awards by arbitrators, there is evidence that Prudential is settling individual arbitration cases on terms far more generous than the class-action settlement.
The firm typically requires lawyers and investors to sign strict confidentiality agreements. But Richard P. Ryder, editor of the Securities Arbitration Commentator, which tracks brokerage arbitration cases, said it appears that Prudential is settling most of the arbitration cases, paying back a large percentage of customers’ actual losses.
“When you compare that with the 4 or 5 cents on the dollar that (the class action) promises, the class settlement doesn’t seem so good,” he said.
Ahearn declined to comment on settlements in arbitration cases beyond saying, “we settle cases on an individual basis.”
Under the class-action settlement, Prudential and Graham will establish a pool of $37 million in cash to reimburse investors. Investors also are promised $24 million in future payments from Graham and a $13-million advance on administrative expenses for reorganizing the partnerships--a sum which ultimately must be paid back.
The investors will be offered shares in a new corporation created from the partnerships. But the new company has been sharply criticized by investors’ lawyers because a number of officials of Graham itself will be managing the new company.
The total value of the settlement is uncertain, in part because no one knows what the value of the shares in the new company may eventually be. Grossman, the lead class-action lawyer, estimates it to be worth $100 million--which would mean investors eventually receiving something less than 7 cents on the dollar for their $1.44 billion in losses.
Boyd Page, an investors’ lawyer in Atlanta, contends the $100-million figure is purely speculative and likely to be much smaller. And Hanzman sharply criticizes the cash portion of the class-action settlement as inadequate.
“They took in over $1.3 billion from investors, kept the money for nine years, and now they want to give back $37 million,” Hanzman said. “They’re paying people 2 cents (cash) on the dollar for an investment which in my opinion was a fraud.”
