WASHINGTON -- A federal judge in Pennsylvania has refused to dismiss a bondholders suit over a 1985 Guam issue underwritten by Matthew & Wright.
He had ordered that the suit proceeds toward trial, even though similar suits over other Matthews & Wright deals are still on hold.
The judge, Daniel H. Huyett 3d of the U.S. District Court for the Eastern District of Pennsylvania, has not yet issued a written order spelling out his decision. But he made clear in a recent conference with lawyers involved in the class action suit over the $300 million Guam multifamily-housing issue that he wants the case to move forward, with a trial tentatively scheduled for the second half of 1992, the lawyers said.
The timetable for the suit, agreed to by the judge, was mentioned in the third-quarter financial report of Matthews & Wright Group Inc., the parent company of the former broker-dealer that underwrote dozens of questionable municipal bond deals in the mid-1980s rush to beat new tax law restrictions.
The financial report shows a further reduction in Matthews & Wright's net work to $8.5 million, from $8.7 million in the second quarter, with liabilities including almost $1.2 million in legal fees and settlements of lawsuits.
The suit over the Guam bonds, the Manitowoc Co. v. Pittsburgh National Bank, was filed in 1988 in the court in Pennsylvania by the law firm of Greenfield & Chimicles in Haverford, Pa., on behalf of the Manitowoc Co. -- a Wisconsin company that purchased $3.93 million of the bonds -- and at least 200 other bondholders.
The suit charges Pittsburgh National Bank, the trustee; Matthews & Wright; and nine other parties to the Guam deal with securities fraud, racketeering, and misrepresentation, concealment, and omission of key facts regarding the bonds.
"It alleges that the defendants failed to disclose a number of things like the lack of feasibility of the housing projects" that the bonds were to finance, said Michael D. Gottsch, a lawyer with Greenfield & Chimicles.
"The effect of the lack of disclosure was to enable the bonds to be sold and to trade at an inflated price so that the people that bought the bonds paid more for them they were worth," Mr. Gottsch said yesterday.
The lawsuit had been put on hold by Judge Huyett -- along with other lawsuits against similar bond deals that had been transferred to the court in Pennsylvania and consolidated -- because of unresolved issues about whether the interest earned on the bonds was taxable.
Lawyers for Matthews & Wright and the other defendants had argued that the Guam suit should be dismissed in part because the Internal Revenue Service decided not to tax the bondholders.
IRS officials concluded in 1988 that the Guam bonds were not tax-exempt because when they were issued there were no reasonable expectations that the proceeds would be used for projects. But they agreed not to tax bondholders as part of a 1989 settlement in which Guam paid the IRS $4.7 million, including about $2.42 million that came from Matthews & Wright and other parties to the deal.
The suit filed by Greenfield & Chimicles, however, alleges that the bondholders were hurt because the prices of the bonds dropped when it appeared that IRS might tax the bondholders. Bondholders might never have purchased the bonds at all had they known that the projects to be financed were not feasible, according to the suit.
Judge Huyett agreed to proceed with the suit under a tentative schedule that calls for information-gathering to continue through June 1992. A trial could be held after that.
Meanwhile, Matthews & Wright's quarterly financial statement shows assets of $10.22 million and liabilities of almost $1.68 million, down from $10.5 million and $1.8 million, respectively, for the second quarter. Stockholders' equity was $8.54 million, compared to $8.7 for the second quarter.
Matthews & Wright was forced out of the municipal bond business in 1989 by the Securities and Exchange Commission after closing almost two dozen questionable deals without cash in a rush-to-market to beat new tax law restrictions. The Guam issue was closed with cash but was among many other questionable deals that were underwritten by the firm.