In an effort to resolve three lawsuits, Merchants Bancshares has offered to repay $9 million to trust clients whose money the bank invested in a mutual fund that lost a quarter of its value.

"We assume the lawsuits will go away because we have restored the funds to the individuals," said Joseph L. Boutin, president and chief executive of the Burlington, Vt.-based holding company. "There's no loss."

A class action filed in late October accused Merchants of mismanaging $40 million in trust funds. Two additional lawsuits, independent of the class action have been filed - one on behalf of a Connecticut woman who claims she lost about $125,000, or 30% of her investment.

The $9 million payment in December will restore the trust accounts to the levels they would have been at had the company left their money in Government National Mortgage Association, or Ginnie Mae, securities in October 1993.

The bank instead invested in a fund run by Minneapolis-based Piper Jaffray Co. That fund, the Institutional Government Income Portfolio, speculated in derivatives, whose value plummeted 25% this year with the rise in interest rates.

The Ginnie Mae fund has only lost about 3% in value since October 1993.

Merchants' action follows a review of the trust investments by Mr. Boutin, who concluded that the use of the Piper fund was inappropriate.

Merchants has since withdrawn all of its clients' trust funds from the volatile fund and transferred them to overnight money market accounts. The money will be left in those accounts until individual clients decide what to do.

Mr. Boutin is also reviewing individual actions by trust department officials, including Merchants Trust Co. president Susan J. Moses.

Attorneys for class action plaintiffs applauded the bank's decision to restore the money. But they cautioned that since Merchants' out-of-court offer is not a formal settlement supervised by a judge, it doesn't protect each of the bank's clients.

"It should have gone through the court," said attorney Dennis J. Johnson, of Havertown, Pa. "People would have been protected that way."

The status of the lawsuit is currently unclear. Mr. Johnson has asked for a conference with the judge, but the judge removed himself from the case last week and a new one has not been appointed.

Merchants officials expect to pay the $9 million settlement within two weeks. The bank's Tier 1 capital ratio stands at 6.7%, with $48 million supporting it.

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