THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Wednesday, May 10, 1995 TAG: 9505100451
SECTION: BUSINESS PAGE: D3 EDITION: FINAL
SOURCE: ASSOCIATED PRESS
DATELINE: WILLIAMSBURG LENGTH: Medium: 66 lines
Stuck with more than $1 million in losses from risky investments, city officials have sued a Texas brokerage firm to recoup the money.
The city alleges that the firm misled the city about the securities and failed to alert the city when their values began to plummet.
But Jim Ogg, president of MGSI Securities Inc. in Houston, said Williamsburg officials, particularly Finance Director Ray Adams, knew fully what they were buying, and are wrongly blaming him for losses the city suffered as a result of market fluctuations.
``Our question to the city is, if you didn't understand them when the price was going down, then why did you understand them when the price was going up? It's very convenient, it's human nature, once your portfolio depreciates in value, you want someone to come to your rescue,'' Ogg said. ``We empathize with the city and with the taxpayers, but our business is not to insure the investments of the city of Williamsburg.''
Had Williamsburg held onto the securities, as other municipalities across the country have done, the city's losses would have been reduced as recent prices have approached levels at which the securities were bought, Ogg said.
Adams declined comment on the lawsuit.
City Manager Jackson C. Tuttle said MGSI failed to fully inform the city on the nature of the longer-term securities, known as derivatives. Earlier this year, after Tuttle realized the potential for losses the city was exposed to by the volatile but high-yield investments, City Council agreed to get rid of $5.1 million worth of securities. About half of those were derivative stocks - complex financial arrangements tied to rising or falling values in some underlying asset.
The city lost $1.2 million of its principal when it sold the stocks.
``We think that what we were sold was inappropriate and illegal,'' Tuttle said. The lawsuit also accuses MGSI of ``misrepresentations and concealment of facts'' regarding the stocks sold to the city.
But Ogg said all facts - including the nature of the risks involved - were disclosed repeatedly.
If there is anyone to be blamed, Ogg said, it is everyone's failure to correctly predict changes in the market in the fall of 1993, when interest rates bottomed out.
``If mistakes were made, we could say, had we known, or had Mr. Adams known, that the Fed was going to raise interest rates six times in a 13-month period, none of us would have bought any bonds. It was the worst performance of the bond market in 70 years.''
Williamsburg was not alone in suffering losses in the market. Orange County, Calif., filed for bankruptcy protection in December after losing $1.5 billion because it borrowed heavily to invest in derivatives.
The majority of the derivative stocks owned by the city were sold by Crestar Securities, and the City Council already has authorized a lawsuit against the company.
Tuttle said Monday that the city still is trying to reach a settlement with Crestar Securities.
Even though MGSI Securities sold about 9 percent of the city's derivative stocks that fell in value, the city is seeking to recoup all $1.12 million in losses through the lawsuit. The city is seeking $500,000 in punitive damages as well as $554,900 to recoup the loss of the stocks and 6 percent interest in compensatory damages. by CNB