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Bevill, Bresler Ruling Settles Test Cases

October 29, 1986

NEWARK, N.J. (AP) _ A judge’s ruling on 10 test cases in the collapse of a government securities dealer clarifies the position of dozens of investors who dealt with the house and could affect the $200-billion-a-day government securities market, lawyers involved in the case said Tuesday.

The 151-page ruling helps define the nature of certain securities transactions, upholds the practice of ″safekeeping″ securities for investors and places some customers under the protection of federal insurers.

The decision came in the bankruptcy case of Bevill, Bresler & Schulman Inc., which entered receivership in April 1985.

Three of its top executives were indicted two weeks ago for conspiracy, fraud and making false financial statements, and an unindicted co-conspirator pleaded guilty Thursday to misleading banks.

U.S. District Court Judge Dickinson R. Debevoise ruled Friday on 10 cases trustees said represented various technical categories of transactions handled by the brokerage houses.

The collapse of Bevill, Bresler and unregulated affiliate BBS Asset Management Corp., left a $188 million shortfall and more than 80 banks, municipalities and individuals nationwide with claims.

The test cases concern repurchase agreements, or ″repos″ in Wall Street slang.

In a repo transaction, a dealer sells securities to an investor and simultaneously agrees to buy them back with interest. A reverse repo works the opposite way, with an investor selling securities to a dealer.

The repo securities often are kept with the dealer in safekeeping.

Debevoise denied a motion by Bevill, Bresler’s trustee that the repos essentially are collateralized loans and affirmed they involved purchases and sales.

He refused to remove Bevill, Bresler’s customers from the protection of the federal Securities Investor Protection Corp. and affirmed that securities in safekeeping actually meant they belonged to the investor.

The last issue was important, Debevoise said, because it determines whether the test case securities belong to the brokers’ estates or the investors.

″The mere presence of secured loan characteristics in repo and reverse repo agreements is not enough to negate the parties’ voluntary decision to structure the transactions as purchases and sales,″ Debevoise wrote.

An attorney for AMC’s trustee, Saul Cohen, said the ruling could alleviate fears of securities investors.

Maintaining repos as purchases and sales ″would ensure that the market functions efficiently and these transactions would remain easily transferrable and liquid,″ said attorney Jack Zackin.

He said if repos could be seen as loans, investors might be reluctant to transfer them.

Cohen noted that Debevoise’s ruling was within the guidelines of similar rulings and matched industry practice.

Debevoise’s ruling also strengthens the chances of some investors - particularly those owed $22 million for securities put in safekeeping by AMC - seeking to get their money back.

On the other hand, the overall pool of funds available to creditors will be reduced because, according to Debevoise’s decision, repo investors count as customers of Bevill, Bresler, said Hayden Smith, attorney for Bevill, Bresler’s trustee.

Keeping repos as sales and purchases strengthens the hand of the Securities and Exchange Commission, said Jason Gettinger, an SEC assistant regional administrator.

If the court termed the agreements loans, no major harm would have been done, although it might have been used in legal arguments against the commission, he said.

Reverse repo customers won’t have preferred status in getting back their money because the ruling termed them unsecured creditors, Cohen said.

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