LOS ANGELES -- Lawyers for certain bondholders in the Washington Public Power Supply System bond fraud case this month told a federal appellate court that a recent U.S. Supreme Court ruling could harm their clients' claims if pending settlements in the case are overturned.
Lawyers for class action bondholders -- those who bought WPPSS units 4 and 5 bonds before June 15, 1983 -- said in a letter to the U.S. Ninth Circuit Court of Appeals that they are concerned about the high court's decision last month that investors cannot bring a securities fraud case that is more than three years old.
The decision, in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbert, said securities fraud cases must be filed within one year after the fraud is discovered and no later than three years after the fraud took place. The ruling encompasses cases in the municipal bond arena.
Concern arises over the WPPSS litigation because Lampf "appears to apply retroactively to pending cases," Melvyn I. Weiss, lead lawyer for the class action bondholders, said in the letter to the Ninth Circuit court.
Mr. Weiss, who helped negotiate out-of-court settlements of almost $800 million to bring the case to a close, urged the appeals court to uphold the settlements. Some disgruntled bondholders have appealed to U.S. District Court Judge William D. Browning's decision to approve certain settlements, arguing among other things that the settlements are inadequate and that they improperly extinguish certain claims in other courts.
"The alternative of trial is not nearly so attractive as the objectors-appallants would suggest, and a reversal and remand would place in jeopardy the ability to make any recovery for a substantial portion of the claims," Mr. Weiss wrote. "Lampf underscores the fact that litigation of this nature is inherently complex and risky, with multiple issues threatening the viability of the claims, some obvious and others hidden."
Mr. Weiss said the Lampf decision could affect WPPSS bondholders "because the bnds were sold from 1997 through early 1981, and the complaint was filed in March 1983. Thus, if the date of 'violation' is the date of sale and/or misrepresentation, most of the class would have missed the three year limitations period."
Mr. Weiss stressed that this is not the only interpretation of Lampf because the decision is new and will be tested in lower courts. Nevertheless, he cautioned that "both retroactive application and equating the date of 'violation' with the date of sale and/or the misrepresentation are possible readings of Lampf."
The settlements stem from the massive bond fraud case spawned by the supply system's $2.25 billion default in 1983 on debt sold for nuclear power unit 4 and 5. Bondholders alleged they were misled about various factors, such as the need for the plants and cost overruns.
Interest earnings and other payments could push the settlement pot to about $900 million. The payout timing remains difficult to predict because of pending appeals tied to the litigation.
A lawyer for one group of bondholders that is appealing the settlements respond last Thursday to Mr. Weiss's comments with a letter to the Ninth Circuit.
Mr. Weiss argues that the Lampf decision "illustrates the wisdom of Chemical Bank [the bond trustee], and class counsel's decision to settle the litigation on terms that they found acceptable," wrote Robert M. Sedgwick.
But Mr. Sedgwick said the key issue in his clients' appeals "is whether the district court ever acquired jurisdication over our clients" so that it could extinguish their claims and subject them to injuctions in the first place.
He continued that the "question is thus not primarily whether the aggregate size of the settlements was reasonable, but whether ouor clients' claims could be obliterated without their ever having a day in court as parties to defend their rights."
Mr. Sedgwick's clients are commonly known as the late buyers because they bought units 4 and 5 bonds after June 15, 1983, the date on which the Washington State Supreme ] Court ruled that the local utilities' promises to repay investors were invalid. Judge Browning ruled that the late buyers did not have legal standing to pursue the bond fraud claims, deciding instead that those claims belonged to the class plaintiffs.
Under the settlement agreement, the late buyers and other current bondholders would share in an estimated $140 million of the settlements. The bulk of proceeds would go to two groups of class action bondholders who bought their bonds before the June 15, 1983, cutoff date.
Municipal market observers have cautioned that the Lampf decision could impose major new burdens on investors who try to pursue federal fraud claims. If applied retroactively, the Lampf ruling also could harm pending investor suits, such as those against nursing home operator First Humanics Corp.
Mr. Sedgwick noted the Lampf decision would have not effect on a pending WPPSS suit by the late buyers group in New York State because that case "is based solely on state law."
Some lawyers have said a fore-shortened statute of limitations for federal cases could push more cases into the state courts, where investors may still be able to assert common law fraud.