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Ohio’s Largest County Sues Over Pooled Investment Fund Losses

August 15, 1995

CLEVELAND (AP) _ Ohio’s most populous county on Tuesday sued six brokerage houses and a bank, seeking millions of dollars lost in the collapse last year of a county investment fund known as ``SAFE.″

Cuyahoga county, which includes the city of Cleveland, lost more than $115 million when it shut down the Secured Assets Fund Earnings program, known by the acronym ``SAFE.″ Commissioners pulled the plug on the fund last year after The Plain Dealer newspaper reported that fund managers had engaged in a variety of risky investment strategies.

The lawsuit, filed by county Prosecutor Stephanie Tubbs Jones in Cuyahoga County Common Pleas Court, says the brokerages took advantage of fund managers’ lack of sophistication and ``churned″ the account to make millions of dollars in fees and commissions. Churning is a practice of excessive trading to improve a broker’s lot while leaving a client no better off or worse off.

The lawsuit seeks unspecified compensatory and punitive damages.

Named as defendants are National City Corp. of Cleveland, a bank holding company, and brokerage houses McDonald & Co. Securities Inc., Dean Witter Reynolds Inc., Kemper Securities Inc., Smith Barney Inc. Paine Webber Group Inc. and Tucker Anthony Inc.

The suit alleges negligence on the part of all six defendants, and accuses McDonald and National City of violating anti-fraud provisions of Ohio’s securities law.

SAFE had pooled county tax receipts with money from a variety of local governments, school boards, libraries and other groups. When the fund collapsed the county repaid other investors first, and wound up holding millions of dollars in bonds worth far less than their face value.

Commissioners imposed across-the board budget cuts and county agencies trimmed staff and services in an effort to absorb the blow.

County Treasurer Frank Gaul and his former chief investment officer, Timothy Simmerly, were indicted in June on misdemeanor counts of dereliction of duty. Both have pleaded innocent.

The lawsuit says the defendants had a duty to make sure that SAFE policies were followed, but helped fund managers execute numerous trades violating the policies.

The suit also says brokers _ knowing that fund managers lacked experience of training in managing such a large portfolio and relied heavily on advice from the brokers _ took advantage of the managers’ ignorance and racked up thousands of speculative or unnecessary trades.

McDonald Chairman William Summers Jr. said in a statement that the brokerage had done nothing wrong.

``We deeply regret the county’s decision to attempt to hold others responsible for losses resulting from its own decisions,″ he said. ``As a major Cuyahoga County employer and taxpayer, we are extremely concerned by the SAFE program’s losses. The simple truth, however, is that these losses did not result from any actions by McDonald & Co. or any of its personnel.″

Paine Webber spokesman Peter Casey said the company had not yet seen the suit, but said it appeared to involve actions by Kidder, Peabody & Co. before Paine Webber purchased it late last year. Casey referred questions about liability to Kidder, Peabody lawyer John Liftin. Calls to Liftin’s office in New York were unanswered Tuesday evening.

National City, Kemper, and Tucker Anthony officials all declined comment.

A message seeking comment was left for Smith Barney branch manager Mansoor Kisat in Cleveland.

Dean Witter Reynolds spokesman Timothy Lee in New York could not be reached. Repeated calls to his office went unanswered.

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