Morgan Stanley to Pay $23 Million in Bond Case
Investment giant Morgan Stanley & Co. will pay $23 million to settle claims that it contributed to the looting of trust funds that provided living expenses for more than 200 victims of auto wrecks, industrial accidents and botched medical procedures, according to documents filed Thursday in a Los Angeles class-action case.
The settlement was hailed as a major victory by plaintiffs’ attorneys, who said it assures a flow of income to their clients while the case against other blue-chip defendants continues.
Separately, the company that triggered the disaster by losing a fortune in bonds filed a petition for bankruptcy reorganization this week in Bridgeport, Conn. The bankruptcy case will halt legal proceedings against the company, Stanwich Financial Services Corp. of Stamford, Conn., while it attempts to marshal its assets. But litigation will go forward against a string of powerhouse firms accused of contributing to the loss of the bonds, including Bear, Stearns & Co., Bank of America, Wells Fargo Bank and Bankers Trust Co. of New York.
The case stems from the sudden cessation last fall of income payments to the victims, who for years have relied on settlement checks to pay medical and living expenses. The default led to the discovery that a Stanwich affiliate had frittered away the bonds, using them as collateral for loans from Morgan, which later sold them for nonpayment.
Morgan did not admit liability, and company officials declined comment on the settlement.
The agreement brings recent recoveries in the case to $42.5 million--enough to give plaintiffs all payments due them until May 2003.
The Morgan settlement is the third and largest of the recoveries. In April, Merrill Lynch & Co. agreed in a settlement to meet all scheduled payments due this year--an amount originally estimated at $16.9 million but now calculated at $15.5 million. In May, Bankers Trust agreed to advance an additional $4 million, although Bankers remains a defendant.
The Morgan and Merrill settlements need court approval, and hearings before Los Angeles Superior Court Judge Peter D. Lichtman are scheduled for July.
Plaintiffs’ lawyer Roman M. Silberfeld said the infusion of $23 million takes the financial pressure off victims, who he said might otherwise have been forced through desperation to settle on the cheap.
The case involves trust funds created to pay more than $100 million to people who had resolved serious accident claims through structured settlements. The settlements were arranged in the 1980s mostly by a Merrill Lynch affiliate and a second firm Merrill acquired. They involved buying U.S. Treasury bonds and using the interest to make monthly, quarterly or twice-yearly payments over periods of 20 to 30 years. Until the default last November, no one missed a payment.
But unknown to the plaintiffs, control of the business had passed from Merrill to a Rhode Island businessman and socialite named Jonathan H. Pardee. Operating as Settlement Services Treasury Assignments Inc., Pardee appointed a new trustee, Bankers Trust, to hold the bonds and disburse checks. And Pardee allegedly induced Bankers to accept a permissive trust agreement that allowed Settlement Services to put the bonds in play.
According to court papers, Pardee entered into repurchase agreements with Morgan Stanley, essentially a borrowing arrangement in which he used the Treasury bonds as collateral for a multimillion-dollar line of credit. With marketing help from Bear Stearns, Pardee later sold Settlement Services to Stanwich and its principals, Connecticut businessman Charles E. Bradley Sr. and his son, Charles E. Bradley Jr. of Orange County.
The Bradleys continued the practice of using the bonds to get investment cash from Morgan. According to the lawsuit, the Bradleys used $16 million of the loan proceeds to pay Pardee for Settlement Services. They allegedly lent at least $46 million more to other Bradley-controlled companies that were in weak financial condition.
In March 1998, Morgan sold the bonds, paying itself back from the proceeds and giving the balance to Stanwich. Because people had continued to receive their income checks throughout the period, until the default last November, they were none the wiser.
Pardee and the Bradleys, accused by the plaintiffs of fraud and other wrongs, have denied wrongdoing. Defense lawyer Steve Hogan said the Bradleys believed it was perfectly legal to borrow against the bonds, which was why they bought Settlement Services in the first place.
Hogan said Stanwich filed for Chapter 11 protection to gain time to liquidate loans and other investments. The hope is “to maximize the recovery on its assets so that it [Stanwich] can pay these people as much money as possible, and hopefully pay them in full.”
