Pension system sues bank Maryland blames IBJ Schroder for loss of millions on bonds

November 03, 1995|By Bill Atkinson | Bill Atkinson,SUN STAFF

The State Retirement and Pension System of Maryland has filed a lawsuit against IBJ Schroder Bank & Trust Co. to recover millions of dollars it claims it is owed on bonds issued by Centrust Savings Bank.

The lawsuit, filed in New York State Supreme Court in Manhattan, accuses IBJ Schroder of gross negligence and breach of fiduciary duty as trustee for $1.2 billion in bonds issued by the Miami savings and loan, which failed in 1990.

The pension system, along with other investors, filed the class action suit because IBJ Schroder didn't properly perform its duties to secure the bondholders' investment and built up interest, the suit alleges. The bank also was letting the statute of limitations lapse in a prior suit to recover the money filed against the Resolution Trust Corp., said Peter Vaughn, director of the State Retirement and Pension System.

"Because things aren't resolved yet, we want to extend the statute of limitations until this thing is resolved," Mr. Vaughn said. "They (IBJ Schroder) weren't willing to go along with it."

IBJ Schroder said in a prepared statement that the lawsuit, filed Wednesday, is without merit and the bank intends to "defend itself aggressively."

The New York-based bank said "it has acted properly as a trustee, and in the best interest of the bondholders in this matter."

Maryland's pension system manages $19 billion in retirement and pension of state teachers, police and correctional officers and other government employees, Mr. Vaughn said.

The lawsuit seeks no specific damages, but Mr. Vaughn said the pension system is seeking to recover as much as $71 million. The pension system bought $19 million of Centrust zero-coupon bonds in October 1987, Mr. Vaughn said.

Zero-coupon bonds are issued by companies and municipalities, and pay interest upon maturity, instead of annually.

"These were triple A-rated because they were fully collateralized by securities in a trust that was held by Schroder," Mr. Vaughn said. "It was a good, safe investment. We didn't think that Uncle Sam would step on our toes later on."

He said he wasn't sure how much interest the bonds were paying, but estimated it at 9 percent or 10 percent.

About two years after the pension system bought the bonds, Centrust lost nearly $59 million, and was seized in 1990.

David L. Paul, Centrust's flamboyant chairman, was convicted of racketeering and securities fraud charges a year ago.

IBJ Schroder, the pension system and other investors sued the Resolution Trust Corp. in 1990,seeking full payment on the bonds, which mature in 2010.

"The RTC stepped in and blocked the move," Mr. Vaughn said.

Stephen Katsanos, a spokesman for the RTC, said the agency settled a similar case several weeks ago in which investors recovered some of their money.

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