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Merrill Lynch to Pay $16.9 Million in Bond Case

April 28, 2001|MYRON LEVIN | TIMES STAFF WRITER

Scores of injury victims facing financial disaster from the alleged looting of compensation funds will have their payments restored at least through this year under a $16.9-million settlement with Wall Street giant Merrill Lynch & Co., attorneys in Los Angeles said Friday.

The agreement with Merrill still leaves a string of blue-chip defendants in class-action suits stemming from the loss of a fortune in Treasury bonds. The bonds had generated the interest that paid living expenses for about 200 victims of auto wrecks, workplace accidents and botched medical procedures. They had resolved their claims through structured settlements that guaranteed them income for 20 to 30 years.

Victims of the alleged fraud are owed more than $100 million in total payouts. For the first time last November, their checks failed to arrive, leading to the discovery that the company entrusted with the bonds had secretly used them as collateral and then lost them by failing to repay loans.

"Merrill Lynch is stepping up at this time and doing the right thing by being part of the solution rather than the problem," said Marc M. Seltzer, a lawyer for the plaintiffs.

"The settlement allows the plaintiffs, many of whom continue to suffer from severe physical and emotional injuries, to pursue their claims against the other defendants and at the same time ensure that they will not have to worry about how to meet basic daily needs," he said.

Merrill did not admit liability in reaching the agreement. If the settlement is approved, as expected, in Los Angeles County Superior Court, injury victims will get back payments of money still in arrears, as well as checks due them through the balance of the year.

Litigation will continue against a host of financial powerhouses, including Bank of America Corp., Wells Fargo & Co., Bear Stearns Cos., Bankers Trust Co. of New York, and Morgan Stanley Dean Witter & Co., which are accused of negligence and other wrongs involving the loss of the bonds.

Under terms of the Merrill settlement, the company will pay $7.9 million to the class and advance as much as $9 million more to keep payments flowing through December. The $9 million will come back to Merrill if the plaintiffs are successful in recovering damages from the other defendants.

The dispute involves scores of structured settlements arranged in the 1980s by a former Merrill Lynch affiliate known as Merrill Lynch Settlement Services and by another firm Merrill acquired.

Company spokesman Bill Halldin noted that none of the victims' losses occurred on Merrill's watch. "Although we sold this business 10 years ago and did not have any involvement in the actions that led to the recent problem, we thought it was appropriate to resolve this matter quickly without further litigation and to ensure that these individuals receive the payments they need," he said.

According to court records and interviews, this is what happened after Merrill's exit:

Merrill's successor, Settlement Services Treasury Assignments Inc., was operated by Rhode Island businessman Jonathan H. Pardee. Pardee in 1995 negotiated a new trust agreement with Bankers Trust Co. of New York to hold the bonds and disburse settlement checks.

But although the bonds had been purchased for the sole benefit of people who had settled injury claims, the new trust agreement granted wide latitude in use of the bonds, including to secure loans.

Pardee used the bonds to secure a line of credit from Morgan Stanley. In 1997, Pardee sold the firm to a business controlled by investors Charles E. Bradley Sr. of Connecticut and his son Charles E. Bradley Jr. of Orange County. It was the opportunity to borrow against the bond that prompted the Bradleys to acquire Settlement Services Treasury Assignments, said their lawyer Steve Hogan, adding that they thought this was perfectly legal.

A Bradley-controlled business then borrowed tens of millions of dollars from Morgan Stanley. But loans went into default and Morgan Stanley sold the bonds in March 1998, paying itself from the proceeds and giving the balance to the Bradley firm.

Because payouts from Settlement Services continued, injury victims were none the wiser until their checks failed to arrive in November. Most, though not all, of the victims have since been brought current by the Bradleys.

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