TAMPA — In a major victory for St. Petersburg that further feeds into a backlash against Wall Street, a federal jury ruled Tuesday that Wachovia Global Securities breached its contract and owes the city $10.4 million for not notifying it sooner about a failing investment.
Seven jurors spent more than four hours deliberating in a case that pitted city officials against financial giant Wells Fargo, which bought Wachovia in 2009. After six days of testimony, jurors sided with city officials who blamed Wachovia for losses they incurred when Lehman Brothers went bankrupt.
"The bank was the professional," said juror Michael Gross, 62, of Pinellas Park. "The city might have been negligent, but the city hired the bank to manage those investments. That's what they were paid to do."
Two jurors interviewed by the Tampa Bay Times said both legal teams presented strong arguments in a case that is bound to have ramifications nationwide. About a dozen lawsuits are set for trial in which large investors, including Sarasota County, are seeking to recover losses in Lehman Brothers bonds from the financial adviser who managed the portfolios — Wachovia Global Securities.
While the jurors agreed with Wells Fargo attorneys that the city should have done a better job overseeing an investment portfolio of more than $400 million, they sided with city attorneys in concluding that such negligence was moot because the investments ultimately were Wachovia's responsibility.
"We weren't happy with how the city managed its portfolio," said jury foreman Bill Jotham, 61, of Sarasota. "But the evidence showed that Wachovia didn't do its fiduciary duty."
City officials expect motions related to the trial to be filed in the coming days, and offered few words for comment.
"We're pleased with the verdict, the verdict speaks for itself," said City Attorney John Wolfe.
The verdict was undeniably good news for a city that had spent $1.2 million to fight a case that was far from a sure bet.
"Nothing is ever certain in litigation, but we were always confident in our legal team," Mayor Bill Foster said. Handling much of the litigation for the city were Rob Marcus and C. Bailey King from the Charlotte, N.C., law firm Smith Moore Leatherwood. Helping them throughout was assistant city attorney Jacqueline Kovilaritch.
If the city recoups its money from Wells Fargo, Foster said it will be put back into the city's investment portfolio.
Shortly after the verdict, Laura Fay, a Wells Fargo spokeswoman, issued a statement.
"We appreciate the jury's time and attention on this case," Fay said. "However, we are very disappointed with the verdict that was announced today and will consider our legal options, including an appeal. We believe the investments made by Wachovia on behalf of its clients in the securities lending program were in accordance with investment guidelines.
"The company was focused at all times on serving our clients' interests and we worked very hard and responsibly to achieve the best results for all of the participants … during very difficult economic conditions."
The city sued Wells Fargo in 2010 in an attempt to recoup the money it lost when Lehman Brothers went bankrupt. At the time, the losses were about $15 million. But Lehman Brothers has emerged from bankruptcy, and the bonds the city has are now worth about $4 million. The difference is what the city wanted Wells Fargo to pay.
The city says Wachovia failed to alert it to three credit downgrades in the summer of 2008, a sign of corporate trouble. While they couldn't show documented evidence that the city was warned about the three downgrades, Wells Fargo attorneys argued that the city had plenty of information about Lehman's issues and should have known better.
St. Petersburg's trial drew attorneys from the other cases to watch and observe.
They saw testimony from former Mayor Rick Baker and other St. Petersburg officials. They heard from financial guru Glenn Hubbard, the dean of the Graduate School of Business of Columbia University whose testimony cost Wells Fargo $1,200 an hour.
Wells Fargo attorneys argued the city did a poor job of managing its investments and said it was negligence on the behalf of the city's former finance director, Jeff Spies, that was really to blame.
It almost worked. Gross and Jotham said the jurors didn't think highly of Spies, but they couldn't blame him for the loss because they felt Wachovia was the one who needed to communicate better with its client, St. Petersburg.
"We didn't think Jeff Spies was a credible witness," Jotham said. "But we didn't want to penalize the city for what one man did."
"(Spies) was relying a lot on the bank to give guidance," Gross said. "We don't think the bank was malicious, but they were supposed to be in better contact with the city, and they weren't."
Gross and Jotham said jurors reached consensus quickly and there was little disagreement.
The jurors broke for deliberations at 10:30 a.m. U.S. Magistrate Judge Thomas McCoun instructed them to consider the city's three claims against Wachovia: breach of contract, breach of fiduciary duty and negligence. If jurors found that the city was partly to blame for the losses through its own breach of contract or negligence, McCoun told them to lower the amount the city would get back.
The jurors came back about 3:30 p.m. but were confused about the instructions. They reconvened briefly before coming out with a verdict that had two damage amounts that were different, when they should have been the same. McCoun asked them to reconvene and try again.
Wells Fargo attorney Mary Hackett objected the second time the jury reconvened, stating that the deliberation process seemed biased with finding fault with Wells Fargo. McCoun overruled the objection. By that time, city attorneys were smiling.
Minutes later, jurors returned and awarded the entire amount the city claimed: $10,387,500.
"It came down to who knew what and when," Gross said.
Times researcher John Martin contributed to this report. Michael Van Sickler can be reached at (727) 893-8037 or [email protected]