Judge Stalls Prudential Settlement : Litigation: 137,000 small investors in sharply devalued oil and gas limited partnerships take heart in ruling that delays resolution of class-action suit.
In a surprise ruling that could benefit thousands of small investors, a federal judge in New Orleans at least temporarily blocked the settlement of a massive class-action lawsuit against Prudential Securities that had been widely criticized as inadequate.
The proposed settlement, affecting 137,000 investors nationwide, would have paid investors just a few pennies on the dollar for losses totaling hundreds of millions of dollars. The losses were sustained by investors--including many retirees--who bought Prudential’s Energy Income Funds series of oil and gas limited partnership interests in the late 1980s.
The ruling came as a large, independent oil company expressed provisional interest in making an all-cash offer for the partnerships’ oil and gas reserves, which could yield far more cash to investors than the $22 million currently offered by the settlement.
In a written opinion issued late Friday, U.S. District Judge Marcel Livaudais Jr. said he was indefinitely postponing a ruling on the fairness of the settlement, pending investigations by at least five states, including California, into possible fraud by Prudential and the company that managed the partnerships, Graham Resources Inc. of Covington, La.
The judge also stated, “The court does have serious reservations about the fairness of the proposed settlement to plaintiffs, many of whom were not sophisticated investors and may stand to lose over 90% of the value of their initial investment.”
Legal experts said it is highly unusual for federal judges to block or indefinitely postpone class-action settlements because of state investigations. The ruling was unexpected because lawyers on both sides of the case had said after a hearing earlier this month that the judge seemed to favor the settlement.
Investors, including several thousand in California, invested more than $1.3 billion in the series of 35 limited partnerships. The market value of their partnership interests is now zero. Prudential aggressively sold the partnership interests, allegedly promoting them as safe alternatives to bank certificates of deposit.
Lawyers for many investors have accused Prudential of fraud in marketing the partnership interests, as well as self dealing by the former executive who headed Prudential’s limited partnership program in the 1980s. They have also accused Graham of fraud in managing the partnerships, including charging excessive fees and lying about the source of money that was paid to investors.
In addition to the investigations by state securities regulators, Prudential, a subsidiary of Prudential Insurance Co., is under investigation by the Securities and Exchange Commission, the National Assn. of Securities Dealers and the FBI.
Prudential has repeatedly denied any wrongdoing and says it is cooperating with all pending investigations.
The judge’s ruling marks a setback for Prudential, which has been trying to quickly settle huge claims against it for many different series of limited partnership interests it sold to small investors in the 1980s. Prudential sold about $6 billion of limited partnerships, almost all of which are now worth a tiny fraction of their original value, making the program one of the biggest investment disasters of the 1980s.
Prudential, stung by negative publicity, recently launched a massive advertising campaign stressing the company’s integrity, with the slogan “The most important thing we earn is your trust.”
Lawyers for many investors have sharply criticized the settlement as heavily favoring Prudential, Graham and a small group of class-action lawyers who stood to receive more than $7 million in legal fees. They also were critical of the deal because it would reorganize the partnerships into a single corporation run by the Graham executives who allegedly mismanaged the partnerships. Graham is partly owned by Prudential.
Clint Krislov, the lead investors’ lawyer opposing the settlement, called the judge’s ruling “very, very good news.” Lawyer Richard N. Bell, who also argued against the settlement, said, “I think this will give everybody the confidence that this whole thing wasn’t a railroad job.”
But Prudential spokesman Bill Ahearn said, “We still believe that when all the facts are out (the judge) will approve the settlement.”
The judge’s ruling did not mention a development late last week, when Parker & Parsley Petroleum Co., a large independent oil concern based in Midland, Tex., said it is interested in making an all-cash offer for the partnerships’ oil and gas assets. While Parker & Parsley made no specific offer, it said in a letter that if it is allowed to bid and obtain access to partnership documents, it would probably offer between 80% and 100% of the value of the partnerships’ oil and gas reserves. Documents show the value currently at about $677 million.
Graham, which would receive a $13-million fee if the settlement goes through, asked the judge not to consider the Parker & Parsley proposal until the settlement is approved.
Graham’s lawyer, Stephen H. Kupperman, could not immediately be reached for comment Sunday. Edward A. Grossman, the lead lawyer in the class action, also could not be reached.
About 12,000 of the 137,000 investors “opted out” of the settlement, hoping to get better terms by filing individual arbitration cases and lawsuits against Prudential. Lawyers said that if the settlement is changed, those who opted out will be given another chance to consider it.
