CLEVELAND - National City Bank hindered an attempt by the Ohio state auditor to investigate Cuyahoga County's SAFE investment program six months before the fund collapsed under the weight of $115 million in losses, according to a lawsuit filed by the county last month.
The suit accuses National City of concealing from the auditor's investigators records that would have disclosed the risky use of leverage that is blamed for much of the fund's losses. National City, citing its policy not to comment on pending litigation, declined to comment on the suit.
National City is one of seven institutions sued by the county as part of its effort to recoup money it lost when it invested taxpayer money in government bonds and high-risk financial instruments. The county claims the institutions, including McDonald & Co. Securities of Cleveland, sold inappropriate investments to the Secured Assets Fund Earnings fund when the institutions should have known the fund was taking on too much risk.
National City's role in SAFE was central and its liability is greater than the other defendants, partly because it was custodian of all of SAFE's financial records, according to Ron Riley, assistant county prosecutor.
The suit alleges National City, in its role of custodian, violated state law when it failed to honor a state auditor's request to turn over all of SAFE's account records.
The suit states that "on or about April 13, 1994, the State Auditor's Department sent a letter to NCB requesting, among other things, bank confirmations 'for any and all accounts which may have been held at your institution by Cuyahoga County' for the period of Jan. 1, 1993 through Dec. 31, 1993."
The suit alleges National City "deliberately, or recklessly, acted to conceal the existence of the SAFE account relating to the reverse repurchase transactions, and therefore concealed the extent of losses in the SAFE fund."
The reverse repurchase agreements referred to by the county are financial instruments involving the practice of using one investment, such as a bond, as collateral to borrow money to make another investment. The county's extensive use of reverse repurchase agreements exacerbated SAFE's losses, Mr. Riley said.
The state auditor's request for information on SAFE followed telephone inquiries last year to the auditor's office about SAFE from Crain's Cleveland Business, a sister publication of Pensions & Investments. On April 25, 1994, Crain's published a story which reported that declines in the bond market had created a paper loss at SAFE of about $35 million. At that time, County Treasurer Frank Gaul and other county officials didn't disclose to Crain's that large portions of its investment portfolio were tied up in reverse repurchase agreements.
Failure to disclose pertinent records isn't the only allegation leveled against National City Bank. The suit charges the bank and McDonald & Co. committed fraud when they allegedly advised the county to issue $247 million in one-year notes so the county could put that money into SAFE and reinvest it. To make money on the transaction, the county had to buy long-term bonds and take on interest-rate risk - something the suit contends McDonald and National City should have advised against but did not.
Aside from National City and McDonald & Co., the brokerages of PaineWebber Group Inc., Dean Witter Reynolds Inc., Kemper Securities Inc., Smith Barney Inc. and Tucker Anthony Inc. are accused of violating state law and breaching their fiduciary duty to SAFE by selling it speculative high-risk investments.
