Schools Going After Pa. Bank Over $69M Lost in Investments

School districts that lost $69 million they had entrusted to a Pennsylvania bank are barraging it with lawsuits.

Five central Pennsylvania districts have sued $1.3 billion-asset Mid- State Bank and Trust, Altoona, claiming it failed in its duty as custodian of their funds by permitting risky investments.

And more suits may be on the way. The $69 million was lost by 54 districts in all, according to court documents.

The latest district to sue Mid-State is claiming more than mismanagement. Last month the Tyrone Area School District charged the bank in U.S. District Court with racketeering-conspiring with an investment adviser to defraud the school district and other public investors.

Mid-State is a subsidiary of $6.8 billion-asset Keystone Financial Inc., Harrisburg.

All sides agree that millions of dollars set aside for school construction and renovation is gone, the result of bad decisions by a now- defunct investment firm. In dispute is whether the bank knew the money was at risk and who should have been monitoring where the funds were invested.

"Mid-State Bank performed normal and customary custodial services," said Lana Burkhardt, a spokeswoman for the bank. "The bank had absolutely no duty to monitor investments on behalf of the school districts. The lawsuits filed against Mid-State are groundless."

The bank has countered by suing school board members and other school officials. It argues that they should be held liable because they failed in their duty to protect the schools' funds. A Blair County common pleas court judge has yet to rule on whether the bank can proceed with its case.

School district officials and their attorneys are not commenting. But one of the first suits, filed last October in Court of Common Pleas by South Butler County School District, provides some of the details.

In 1993, South Butler and the other districts appointed John Gardner Black, an investment adviser, to manage funds raised through bond sales. At the same time school officials chose Mid-State Bank to be custodian of those funds.

Mr. Black managed the assets through his two companies, Devon Capital Management Inc. and Financial Management Services Inc.

South Butler claims in its suit that "Devon Capital Management unlawfully took possession of the assets of the school district, pooled those assets with the assets of other school districts and local government units, and invested the combined funds in speculative, risky investments."

Since September 1997, Mr. Black and his companies have been locked in a fraud suit filed by the Securities and Exchange Commission. The suit charges them with moving some of the school districts' money into other accounts Mr. Black held at Mid-State for reinvestment.

South Butler claims Mid-State promised not to let Mr. Black take direct possession of the money. The bank would also be liable for losses "resulting from any act which has not been authorized under the custodian agreement," the lawsuit said.

Mid-State also committed fraud on its monthly statement report to the schools by not reporting that the funds had been transferred, the suit charges.

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