ST. PETERSBURG — City officials filed a federal lawsuit against Wachovia Global Securities Lending this week, claiming that its former investment banker was directly responsible for the city losing $15 million in the securities market in 2008.
The suit alleges that Wachovia, which has since merged with Wells Fargo, violated its lending agreement with the city by making a poor decision by investing in Lehman Bros. corporate bonds, then failing to alert the city when those bonds plummeted in value in the summer of 2008.
The suit had been anticipated for quite some time, and could help the city recoup its losses.
A St. Petersburg Times analysis found that city officials routinely ignored oversight procedures designed to protect losses for nearly a decade. The lapses included the failure of then-Mayor Rick Baker's staff to provide the City Council with regular written financial reports, which is required by the city's investment policy. Also, the city's finance director, Jeff Spies, rarely mentioned anything about the securities lending account in his quarterly financial reports, even as the bonds plummeted.
The city has since made corrections to its review procedures, and the council gets regular financial updates.
Throughout the past decade, the city invested about $400 million, or most of its operating budget. Until 2008, half of that was in securities, an especially risky type of investing. In securities lending, the city temporarily lends its assets to other borrowers and receives cash as collateral, which is then reinvested to make money.
In the lawsuit, the city acknowledges knowing little about this type of investing and relying too much on Wachovia.
"Due to its lack of knowledge and sophistication regarding the securities lending program, the city relied heavily on (Wachovia's) expertise, integrity and professional judgment," the suit states. "The city trusted" Wachovia.
The agreement requires Wachovia and the city to share in revenue, which is defined as "gains and losses." Therefore, the city says, Wachovia owes its share of the losses.
The suit alleges that Wachovia failed to share information about Lehman Bros. bonds that the city owned. In the summer of 2008, as the housing collapse had begun and rating agencies were growing aware that Wall Street had bet too heavily on a bubble, Lehman Bros. stock was downgraded. Wachovia didn't alert the city to the new ratings, a violation of its agreement, the suit claims.
If it had warned the city about Lehman's decline, the city would have sold the bonds to "avoid any further losses."
It wasn't until Lehman filed for bankruptcy on Sept. 15, 2008, that Wachovia told the city of concerns about the now-defunct company's bonds with the city, the suit says.
"(Wachovia) simply told the city it was surprised that Lehman was not bailed out by the government," the suit alleges. "At no time prior, however, did (Wachovia) advise the city that the value of its investment was conditioned on a government bailout."
Michael Van Sickler can be reached at [email protected] or (727) 893-8037.