FLUSHING, N.Y. - The Operating Engineers Local 14-14B Annuity Fund has sued money management firm Wm. Mason & Co., Los Angeles, over undisclosed losses taken in mortgage-backed securities last year.
In an amended complaint in U.S. District Court in New York, the union accuses Mason and an affiliated company, L&S Advisors, of violating the Employee Retirement Income Security Act and of committing both securities and common law fraud.
The suit alleges Mason invested in exotics and derivatives after telling the fund it would not do so. The suit alleges the bulk of the account was in real estate mortgage interest conduits, which were "highly interest sensitive" and "almost totally illiquid."
In addition, the suit alleges Mason put roughly 30% of the fund's money into inverse floaters. Mortgage-backed inverse floaters can be volatile instruments in a rising interest rate environment because both coupon and principal can fall in value as the duration of the security lengthens.
Rick Scott, general counsel for Wm. Mason said: "There is no factual basis behind the suit." He called it "spurious and specious." Mr. Scott said the union has the only lawsuit pending against the company. He declined further comment.
Joseph Rizzuto, a trustee for the fund named as a plaintiff, was unavailable for comment. John Mullery, another trustee, did not return phone calls. The fund has about $225 million in assets, according to the 1995 Money Market Directory of Pension Funds and their Investment Managers. The operating engineers suit does not disclose dollar amounts involved.
An attorney for the Operating Engineers local, Stanley Q. Casey, a partner with Richardson Mahon & Casey, New York, said the case is still in discovery. "We're pursuing it vigorously," he said.
Mason took on the account in February 1993, according to the suit. The suit cites a letter received from a local representative of the firm stating: "The most impressive part of their program is how very little risk is involved. As part of such a low risk philosophy, Wm. Mason is concerned with the preservation of (principal) and safety of your investments."
The suit also alleges Mason "assigned arbitrary and misleadingly high values to securities purchased for the Annuity Fund, thus concealing the losses of principal that had occurred."
Operating Engineers filed its suit in October 1994. The fund seeks the amount of the losses, plus a reasonable rate of return from the date of the investments, and interest. In addition, for the fund's common law fraud cause of action, it seeks punitive damages.
An attorney who is not familiar with the Operating Engineers situation said if the court finds Mason did not follow investment guidelines, the damages could be substantial. Lennine Occhino, ERISA partner for the law firm Mayer Brown & Platt, Chicago, said ERISA violations can result in the return of profits and possibly restoration of losses.
One case in 1991 resulted in a $23 million settlement over trading in uncovered options contrary to plan documents, Ms. Occhino said.
If Mason took losses in mortgage-backed securities in 1994, as the suit alleges, it was not alone. Many bond investors were taken by surprise when interest rates started climbing after the Federal Reserve began hiking short-term interest rates early in the year.
Investors disclosed about $1.95 billion in mortgage-backed securities losses in 1994, according to Capital Market Risk Advisors, New York.
Meanwhile, documents on file at the Securities and Exchange Commission indicate there has been significant change at Mason.
The firm now officially does business as Heritage Asset Management Inc. Previously owned by Imperial Bank in Los Angeles, the investment banking firm of Lippman Scott & Associates, Los Angeles, is now the owner.
In addition, William F. Mason, listed as president in the 1995 MMD, is no longer with the firm, according to SEC documents. Neither is Peter Lane, at one time important enough to be listed in SEC documents as a controlling person, although Mr. Lane's exact role with the firm was not clear. Mason's assets under management are listed in MMD at $330 million as of Sept. 30, 1994.