Trust unit in Arkansas is latest to be sued for using funds that bought derivatives.

The trust subsidiary of an Arkansas banking company is facing a class-action lawsuit on ground that it mismanaged client funds.

First Commercial Trust Co., a subsidiary of First Commercial Corp. of Little Rock, is accused of breaching its fiduciary duty to clients by putting at least $145,000 in two mutual funds that invested in derivatives.

The funds, Managers Short Government Fund and Managers Intermediate Mortgage Fund, have plummeted in value by as much as 31% since January. The two funds are managed by Minneapolis-based Piper Jaffray Co.

First Commercial denies wrongdoing.

"Investing involves the element of risk and all investments cannot be realistically expected to be profitable in every case," First Commercial officials said in a written public statement. "We regret that this course of action has been taken, especially in light of our continuing and dedicated effort to serve our customers in a highly professional and productive fashion."

James R. Pender, a lawyer representing the plaintiffs, said his clients' money is still invested in the funds. He said he is trying to determine the full amount of trust investments by First Commercial in the Piper funds.

The suit against First Commercial, filed in Pulaski County Circuit Court on Nov. 9, accuses the company of failing to inform its clients about the mutual funds' risky derivatives holdings and committed "fraud and deceit" with statements that "the finds were safe, liquid, and short-term investments."

Derivatives are complex financial agreements whose value is tied to the value of another currency, commodity, or security, often fixed-rate mortgages. In recent months their values have fallen as interest rates have increased.

According to the lawsuit, First Commercial invested $145,000 in the two funds between June 1992 and November 1993 on behalf of Arkansas residents Louise N. Burrow and her son, James N. Burrow.

The plaintiffs are seeking compensation for the losses, estimated to be more than $50,000, and punitive damages.

This is the second class-action lawsuit filed in the last three weeks against relatively small trust units of banking companies for investing client money in funds ran by Piper. Piper has also been targeted directly by several lawsuits for its derivatives investments.

A similar class-action lawsuit was filed late last month against Burlington, Vt.-based Merchants Bancshares, charging it with mishandling 40 million in trust money in a Piper mutual fund.

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