TALLAHASSEE, Fla. (Legal Newsline) – Florida has hired a law firm to assess whether the state should pursue legal action against broker-dealers who sold securities to the State Board of Administration.
The investment pool that municipal governments belong to, Florida's Local Government Investment Pool, was affected, but it was not the only fund the SBA manages that was involved, according to SBA Interim Executive Director Bob Milligan.
Milligan has hired the West Palm Beach law firm of Berman, De Valerio, Pease, Tabacco, Burt & Pucillo, which will report to Attorney General Bill McCollum, Gov. Charlie Crist and Chief Financial Officer Alex Sink.
McCollum, Crist and Sink serve as trustees of the SBA, which runs the pool.
McCollum's office said it didn't plan to comment on hiring the law firm. Sink was not available for comment on Wednesday.
"We've used the same firm for a number of years on plain vanilla litigation, just security litigation," SBA spokesman Michael McCauley told Legal Newsline in a telephone interview Wednesday afternoon.
He said the firm has helped the SBA with regulatory securities and fiduciary work in the past and on a number of class actions or related cases.
This case is "a new relationship," McCauley said. "They are going to begin their work immediately but I don't know if there's a deadline per se."
The securities in question were top-tier investment-grade securities that were subsequently re-rated to below-investment grade. It was Sink who ordered an investigation, with members of the State Board of Administration Audit Committee recently completing a performance audit of SBA investment compliance procedures.
Both McCauley and Milligan emphasized that the securities in question were not related to sub-prime holdings.
But despite being top-tier investments, the securities lost value in the market, which Milligan noted in a statement on Tuesday saying, "The uncomfortable aspect is how quickly some of this paper was downgraded subsequent to purchase."
McCauley told Legal Newsline on Wednesday that SBA officials did not know yet if they would sue or if they did sue whether they would sue for money lost, damages or both.
"That's the whole purpose and intent in hiring the firm," McCauley said. "They are really wanting to explore the whole option."
While emphasizing that the problems with investments in the fund were not related to subprime mortgages, McCauley said that the investments were mortgage-related, asset-backed commercial paper.
He said all the securities were purchased within investment grade and they declined after purchase, reflecting market concerns on the cash value or return on the investment.
Although the securities "were downgraded," McCauley said, "they are still in the portfolio," which means that their value can change as the securities mature and are sold.
McCauley explained that the Local Government Investment Pool has been bifurcated into two funds. That happened after trustees decided to freeze the fund late in November, following a run on the fund by participating municipal governments.
The pool reopened Dec. 6 as fund A, which was really the unaffected securities, and fund B, which was the distressed fund. Although some of the securities have since matured and been sold, the proceeds from any of the troubled securities in fund B that are sold go into fund A.
When asked how much money the pool had lost, McCauley said he didn't know "if it was really accurate to say that money was lost."
He said the pool had become "illiquid" which meant that if the SBA hadn't separated the securities into two separate funds that participating municipal governments wouldn't have been able to withdraw, but that up to this point it had not lost money.
He also said the intent was to try to recoup when securities mature or are sold.
As things stand now, there is a little under $9 billion in the government investment pool, with $1.1 billion in market value that remains in fund B, the distressed fund, and $7.5 billion held in pool A.
McCauley explained that even though fund B has become locked up, fund A has not. He said that even if securities from fund B mature at a loss, the proceeds are moved back to fund A, which has no liquidity restrictions and the proceeds are then available to the municipal governments invested in the pool.
When purchased, the investments in funds A and B were worth $8.3 billion. Now, they are worth $8.6 billion.
McCauley said that in the aggregate some of the securities were not really affected, but some have declined because of market conditions. He also said that some are at par.
Milligan said in a statement that the issue "crosses a number of SBA portfolios, including the Local Government Investment Pool."
"We will vigorously explore all avenues in pursuing the interests of our stakeholders," he said.
From Legal Newsline: Reach reporter Lin Young by e-mail at email@example.com.