WASHINGTON -- Van Kampen Merritt Inc. and one of its brokers have been held liable by an arbitration panel for $31,200 in losses resulting from Executivie Life Insurance Co.-backed bonds that the firm sold to an Illinois bank.
In addition, Miller & Schroeder Financial Inc. and one of its brokers have been ordered by arbitrators to pay an investor $15,210 in connection with bonds sold in Texas and Minnesota that have gone into default, including an offering that the firm underwrote with Buchanan & Co., a now-defunct underwriter of retirement center bonds.
The decisions by arbitration panels of the Municipal Securities Rulemaking Board were announced this week.
The ruling in the Van Kampen case marks the second time this summer that MSRB arbitrators have found a major securities firm liable for losses that an Illinois bank suffered in connection with bonds backed by Executive Life. The insurer was placed in conservatorship in April.
In the earlier case, Merrill Lynch & Co. and its broker were ordered last month to pay roughly half of the $355,334 in damages sought by an Illinois bank in connection with four taxable bond issues in Louisiana and Texas.
This time, however, Van Kampen was told to pay only a fraction of the $490,000 asked by an Illinois bank that in 1989 had bought a total of $650,000 in taxable bonds issued by the Southeast Texas Housing Finance Corp. and the El Paso Housing Financing Corp. in 1986.
Both banks were unnamed in the arbitration rulings.
The bank in the Van Kampen case charged that the firm and its broker, James M. Kohlmeyer, had failed to provide official statements for the bonds until after the sale date and that the documents were outdated and inaccurate.
The bank charged that documents did not disclose that bond proceeds had not been invested in mortgage loans, but instead were invested in guaranteed investment contracts issued by Executive Life.
The bank also said it was well known in the investment community that Executive Life was experiencing significant financial difficulties when it bought the bonds, and that such information should have been disclosed.
Van KAmpen argued that it had no duty to provide an official statement before the bank bought the bonds in the secondary market, that it had no knowledge or reason to know of any "material facts" that would harm the value of the bonds, and that it did disclose to the bank that the bonds had an Executive Life guaranteed investment contract.
The MSRB arbitration panel ordered Van KAmpen and its broker to pay $31,200 in damages only on the Southeast Texas bonds.
Meanwhile, arbitrators ordered Miller & Schroeder and its broker, Christopher Deckas, to pay an investor $15,210 for losses in connection with two tax-exempt offerings that have gone into default. They are a $27 million Bexar County, Tex., Health Facilities Development Corp. first mortgage revenue bonds offering, series 1984, for the Trinity Retirement Living Foundation Project, and a $2.45 million St. Cloud, Minn., housing development revenue bonds offering, series 1985, for the Finch Estates Project.
The investor, who sought just over $15,000 in damages, charged Miller & Schroeder with violation of the antifraud statutes of the federal securities laws, negligent supervision, and violations of fair practice. Miller & Schroeder argued that it and its broker fully apprised the investor of the risks involved in the bonds.
Charles Feuerbacher, assistant vice president for NCNB Corporation Trust, which was trustee on the Bexar County bonds, said the retirement center was built but subsequently went into default and bankruptcy. Under a settlement reached in bankruptcy court, roughly 1,734 bondholders across the country have received roughly 41 cents on the dollar for their losses, he said.
The bonds sold by Van Kampen were from a $300 million offering of Southeast Texas Housing Finance Corp. Multifamily Housing Revenue Bonds, series 1986A, due Sept. 1, 1996, and underwritten by Drexel, Burnham, Lambert Inc.; Howard, Weil, Labouisse, Friedrichs Inc.; and Rotan Mosle Inc. They also were from a $200 million offering of El Paso Housing Finance Corp. 8.88% multifamily housing revenue bonds, series 1986A, due Oct. 15, 1996, also underwritten by Drexel, Howard Weil, and Rauscher Pierce Refsnes Inc.