BofA Still Mopping Up After Merger

 

Five years after acquiring Security Pacific, BankAmerica is still mired in legal problems stemming from the questionable activities of its former Southern California Rival.

BofA currently is locked in court battles with former Security Pacific trust department customers who say the bank took kickbacks on investments and defrauded them of millions of dollars.

At a hearing last Friday in San Francisco U.S. District Court Judge Charles Legge granted class-action status to a case alleging that Security Pacific formed risky limited partnerships and then sold them for a fee to its supposedly conservative trust department.

If true, the actions would constitute fraud and violate several trust laws, including regulations that prohibit a financial institution from doing business with itself.

The judge also ruled that the bank had breached its trust and is liable for damages.

"This is an egregious case of self-dealing in which Security Pacific invested millions of dollars in speculative and improper investments for its own gain," said Robert Mills, attorney for trust customers Louis and Frederick Fisher.

A spokesman for BankAmerica responded that the suit, which covers 1,350 customers and investments of more than $20 million, was without merit.

"Our view is that the rulings have no bearing on the larger issues of the case," he said. He said the investments were proper and that Security Pacific had committed no offense.

The Fisher case is just one action charging wrongdoing by the trust department of the former Security Pacific Bank, which BofA bought in 1992.

In another action, also brought by Mills, some 6.,700 beneficiaries claim they were not given sufficient refunds by Security Pacific Corp., which for almost 20 years routinely overcharged its trust department customers.

The Fisher case revolves around several investments but a key one was made in 1990, when Security Pacific agreed to invest more than $13 million in a real estate limited partnership called Sunpointe Redmond '90, a 400-unit garden apartment complex in Redmond, Wash. The investment has had only marginal returns and is said to be worth only about $10 million.

The plaintiffs claim the deal amounted to little better than real estate speculation. Moreover from the beginning, they say, Security Pacific decided to fund the investment with money from its trust customers, whose investment criteria is generally conservative.

According to one former bank official who requested anonymity, Security Pacific's trust department was wager to book higher fees. To hit its targets, the department instructed its real estate unit to find investments.

"Management then ordered the trust officers to buy the stuff for their client portfolios even though they objected that the investments weren't suitable," the source said.

The bank not only got a fee for managing the trust but also got a fee for selling the real estate partnerships it helped set up to its own trust department.

BofA argues that the fee was proper though it later returned at least a portion of it.

"These investments were made for diversification purposes," said attorney Jessica Pers of Heller Ehrman White & McAuliffe, who represents the bank. She might not make money but still represent portions of a balanced portfolio.

Nevertheless, the Office of the Comptroller of the Currency, a federal banking agency, was concerned enough about the suitability of the investments to conduct an investigation in 1993. Their findings have not been released publicly.