ST. PETERSBURG — It's a cautionary tale of what happened when Main Street met Wall Street, when municipal bureaucrats and elected officials thought they could make sophisticated wagers on high finance and rake in easy profits as if they were investment bankers and hedge fund managers.
For St. Petersburg, the experiment ended in disaster in 2008 with the city losing about $16 million in Lehman Brothers corporate bonds that crashed and burned when the once mighty financial giant filed for bankruptcy.
It's an astounding loss, one that pins St. Petersburg — a city with a population of about 245,000 — with the sixth-biggest loss among municipalities caught in the Lehman Brothers fiasco .
Starting Monday, the tale of what went wrong will unfold before a jury and U.S. Magistrate Judge Thomas McCoun at Tampa's federal courthouse.
Lawyers representing St. Petersburg will argue that the city's former financial adviser, Wachovia Global Securities, failed to alert officials about the declining financial health of Lehman Bros. and should be held liable for the losses.
The jury will hear an opposing view from Wells Fargo, a financial services behemoth that in 2009 bought Wachovia, which was teetering on collapse. Far from being innocent, the city was "acutely aware" of the risks involved when it hired its adviser, approved the investments and agreed to bear all potential losses, lawyers representing Wells Fargo will argue.
The case is part of a raft of civil suits attempting to hold Wall Street accountable for the wreckage that laid waste to pensions and public treasuries.
To recover the blown investments, cities like St. Petersburg will need to clear an imposing legal hurdle, said Ken Kriz, associate professor of finance and economics at the University of Nebraska at Omaha. He was vice chair of Omaha's Civilian Employees Retirement System, which lost $5 million in its pension in bad Lehman bonds.
Omaha didn't sue, however, because of the perceived difficulty in proving guilt, Kriz said.
"It's one thing to say that you should have been informed more on the risks," Kriz said. "But it's another to prove that the failure of disclosure was intentional or misleading. It's a thin line separating the two."
• • •
The stakes in what could be an eight-day trial are high.
Mayor Bill Foster is anticipating a budget deficit next year that's about the size of what the city seeks in the lawsuit, or about $15.8 million. The city's legal tab has climbed to $1.2 million in the effort to recoup the Lehman money, which had been part of a total investment portfolio of $395 million.
For Wells Fargo, which faces similar lawsuits, a losing verdict could set a costly precedent.
"They're throwing a lot of money at this," said City Attorney John Wolfe. "They feel they can't afford to lose it, that they're facing losses of $500 million if they lose."
St. Petersburg's road to ruin started in 2001 when, despite warnings from outside financial experts, the City Council approved securities lending, a type of financial transaction where the city temporarily lends its assets to others and receives cash as collateral, which can be reinvested to make money. The risk comes when the city makes an investment that loses money, which would then have to be repaid.
It wasn't an issue until 2007 when its financial adviser, Wachovia, bought some Lehman Bros. bonds. Bad timing. The once-vaunted Wall Street firm was just then entering a corporate death spiral that would end with its Sept. 15, 2008, bankruptcy.
The city's case hinges on its claim that as Lehman Bros. continued to be downgraded in the summer of 2008, Wachovia didn't tell city officials. The bank will counter that no one could have predicted Lehman's demise, and that the city was always in control over its investments.
Former Mayor Rick Baker, City Administrator Tish Elston, and former mayoral candidate Kathleen Ford, and three current council members — Jim Kennedy, Wengay Newton and Karl Nurse — are among the witnesses who may take the stand.
• • •
The graveyard of other local governments who lost millions in the Lehman Brothers collapse is crowded. Sarasota, for instance, lost $40 million.
But Wells Fargo wants to limit what the jury hears to only the St. Petersburg case. Sarasota's losses aren't relevant to St. Petersburg's case, Wells Fargo argues in court documents. On Friday, however, McCoun ruled other lawsuits could be introduced, as long as they were found to be necessary and appropriate.
City attorneys, meanwhile, want to exclude from the trial six articles that ran in the Tampa Bay Times between 2008 and 2010. A 2009 article reported that city officials routinely ignored oversight procedures designed to protect losses. One of the lapses included the failure of then-Mayor Baker's staff to provide council members with regular written financial reports as required by city policy.
McCoun ruled Friday that even if the articles show a coverup by city staff, they are irrelevant to the real issues of the case. Wells Fargo attorneys will, however, be able to question witnesses about statements they made in the articles.
City attorneys have objected to letting Wells Fargo use video of City Council meetings since 2007.
Specifically, Wells Fargo wants to play video from a December 2008 City Council meeting, in which Nurse essentially lays out the bank's defense by saying the city's finance team shouldn't be blamed for the losses.
"A year ago, would anybody have thought that loaning money to Lehman Brothers was a risk?" Nurse said then. "And from what I saw in the meetings, as fast as the staff found out the issues, they were moving as fast as they could move."
"It makes no sense to require Wachovia to call Councilman Nurse as a witness simply to confirm his public statements," the bank states in a court filing.
Nurse said Friday he didn't know his comments, which he said were twisted out of context, might be used in the trial.
City attorneys argue that because the council doesn't oversee the investments in dispute, Nurse's comments are irrelevant.
McCoun ruled Friday that the use of video as evidence will be addressed during the trial.
Times researchers Caryn Baird and Natalie Watson contributed to this report. Michael Van Sickler can be reached at (727) 893-8037 or [email protected]