WASHINGTON -- The Senate yesterday approvjed an amendment to bank rescue legislation that would exempt pending securities fraud cases from the Supreme Court's recent decision limiting the time investors have to file actions in federal courts.
Only cases filed after the high court's June ruling in Lampf v. Gilbertson would be covered by the decision, which stated that any litigation brought by private investors under the antifraud provisions of the federal securities laws must be initiated without one year of the discovery of the violation and no more than three years after the violation occurred.
But the amendment's future is uncertain because the banking bill contains several controversial provisions and may not be approved by Congress this year.
The Senate action occurred as a House panel heard testimony from a Mississippi bank that bought $2.2 million in taxable municipal bonds backed by Executive Life Insurance Co. and warned Congress that it may not be able to recover its losses in court because of the Supreme Court's decision.
Frank Riley, general counsel for the Bank of Mississippi, told the House Energy and Commerce Committee's subcommittee on telecommunications and finance that the bank may be barred from filing securities fraud charges under the court's ruling unless Congress approves bills now pending to amend the decision.
The bank's testimony came as backers of the repeal legislation told the panel that about $6.4 billion in pending federal securities fraud cases have been or may shortly be dismissed nationwide because of the decision.
The ruling unleashed a storm of protests from investors and securities lawyers who are pushing bills introduced in the House and Senate to overturn the decision.
However, a broad coalition of 35 accounting firms, law firms, and industry groups joined forces recently to oppose the bills introduced in the Congress.
Mr. Riley told the House panel that in 1986 and 1988 the Bank of Mississippi bought a total of $2.2 million in taxable bonds issued by the Memphis, Tenn., Health Education and Housing Facility Board and the Nebraska Investment Financial Authority. Using the Tennessee bonds as an exampl, he said the official statement said that most of the proceeds would be temporarily invested in Executive Life-guaranteed investment contracts until they were used for their stated purpose -- to provide low-income housing loans.
"In reality, all of the funds, after fees were paid, were turned over to Executive Life, which in turn invested the proceeds in high-risk junk bonds allegedly from Drexel Burnham Lambert," Mr. Riley said. "When the junk bond market collapsed, the value of the housing bonds plummeted.
But Mr. Riley did not say how much the bank lost on the bonds.
"The offering material in no way disclosed the fact that the bond proceeds would be invested in junk bonds. The Bank of Mississippi had no way of discovering the fraud until both the bonds' rating and the market value were substantially diminished and then later defaulted."
Mr. Riley said that, when the Lampf ruling was announced, the bank had not yet field its antifraud lawsuit because it was still developing its case. He said the only way it can proceed is if it is consolidated in a larger case against Executive Life that is waiting for certification as a class action in federal court in New Orleans.
"Let there be no mistake, the bank would never have purchased the bonds and certainly not in widows' and children's trust accounts had it known the proceeds were invested in junk bonds," Mr. Riley said.
In related actions, a federal district court in Ohio last month dismissed most of the federal fraud claims of bondholders in the First Humanics nursing home bond case. And a Colorado federal judge in September cited the Lampf case when it dismissed a $4.5 million class action lawsuit by the Bank of Denver over troubled Will-O-Wisp special district bonds.
"In a typical municipal bond offering, two to three years of interest payable to the bondholders is escrowed, so the bondholders can have no inkling that anything is awry until they do not receive an interest payment many years after the closing of the offering," the coalition backing the House and Senate bills said yesterday.
"The average time-span between the issue date for municipal bonds and the date of default in repayment is approximately 4.5 years. These issues are not registered with any state or federal regulatory agency and are essentially unregulated," the group said.