REPRESENTATIVE LITIGATION MATTERS

Corporate Indenture Exposure - Purchase of Corporate Bonds

Legal Issues:

1. Fiduciary duty of Financial Institution under an Indenture.
2. Fiduciary duty of Pension Fund Board of Directors.
3. Duty of Disclosure of Pension Fund Board of Directors.
4. Multiple Conflicts of Interests; Self-dealing.

Situation:

Alleged Facts:

The PSRF asserted that the Financial Institution had (1) failed to thoroughly examine the borrower’s statements and other documents submitted in accordance with the Indenture,
(2) failed to trigger a default when the borrower did not deliver various documents within
the "cure" period provided by the Indenture, (3) failed to have a working "follow-up" system
and training programs to support the Indenture Trustee, and (4) been negligent and had breached its fiduciary duty.

Potential Liability:

The Financial Institution faced (1) actual calculated damages in excess of $200 million with prejudgment interest of 10% due for several years, (2) an extremely adverse venue since the Plaintiff’s retirement recipients would comprise approximately 80% of any jury, (3) a state legislature that was loathe to raise taxes to correct any shortfall in the Fund, and, (4) a state supreme court that had overruled 75 years of prior jurisprudence to ensure that the case would be tried in the state capitol which contained the highest percentage of current and potential recipients.

Analysis:

H. S. Grace & Company, Inc. (HSG) found that the Financial Institution had serious deficiencies with systems and training its corporate indenture trustees. However, its analysis proved that the Indenture Trustee had neither the obligation to peruse the documents submitted by the borrower nor to precipitously call a default.

In addition, HSG’s analysis of the environment surrounding all business and personal dealings of the directly relevant persons indicated that the Chairman of the PSRF had engaged in serious conflicts of interest that tainted the decision making process which led to the initial and subsequent investments made by the PSRF.

Result:

Upon presentation of the Financial Institution’s key evidence, supported by an independent regulatory expert located by HSG, PSRF dismissed its case against the Financial Institution.

It is noteworthy that the state’s office of the Attorney General, operating at the direction of the Governor, had failed in its exhaustive investigation to uncover the conflicts and self-dealing of the Chairman of the PSRF due to its inability to leverage any significant experience in both forensic accounting and financial operations.