Madison County has filed a claim against an investment banking firm seeking to recover $400,000 in losses it alleges were due to the purchase of risky bonds.
The case brought against Sterne, Agee & Leach, Inc. of Birmingham, Ala. was filed as an arbitration matter before the Financial Industry Regulatory Authority (FINRA) in August.
It claims that Sterne's broker Richard D. Holt of Hot Springs, Ark., who acted as a registered agent for Madison County's brokerage account until last December, recommended numerous securities that exposed the county's operating funds to risk, and which were in direct contravention to its investment policy.
Madison County Treasurer Kurt Prenzler, who was elected last November, said Holt has not done any additional business with the county since he took office in December.
Holt, who was contacted by phone on Thursday, said that he was "vaguely" aware of the complaint. He declined to comment on the matter.
The county's investment policy states that securities purchased cannot have a maturity date of more than 10 years.
According to the complaint, Holt recommended numerous securities - step-up bonds - that carried maturity dates beyond the 10-year limit.
The reason the length of the maturities is restricted to a maximum final maturity of 10 years is because bonds with longer maturities expose Madison County's funds to interest rate risk, the complaint states.
"Holding bonds with long maturities...could result in massive losses," the complaint states.
"If, during a rising interest rate environment, Madison County needed access to its operating funds and it held such bonds, it could cost Madison County tens of millions of dollars," the complaint states. "These types of securities, therefore, are obviously not safe investments, and it is for this reason that they are prohibited by Madison County's Investment Policy."
The complaint compares Madison County's investments to 12 other counties. Madison County is the only one of those counties with bond investments that had maturity dates exceeding five years.
Prenzler said that when he took office, 40 percent of the investments had maturity dates between 11 and 15 years.
He said the step-up bonds were sold because they exposed the assets to significant rate risk.
"The recommendations to purchase bonds with maturities beyond ten years for a county government's operating funds should have raised red flags," the complaint states. "Bonds with these extended maturities are highly unusual for a county government's funds."
In the complaint, the county also is seeking attorneys' fees, costs, interest and punitive damages.
It is represented by Bruce D. Oakes of Oakes & Fosher in St. Louis.
Prenzler claims that his predecessor Frank Miles, whom Prenzler defeated last November, "illegally" purchased $41 million in bonds while in office. Miles was appointed after former Treasurer Fred Bathon resigned in 2009.
Prenzler had asked State's Attorney Tom Gibbons to investigate.
On Sept. 6, Gibbons issued a statement that Miles did not violate state laws, however, Miles did violate his own office's investment policy. Gibbons said that because it was an internal policy, "It did not have the force of law or the effect of the statute or the ordinance. It simply was an internal policy that was created at the will of the treasurer and could be changed at any time to accommodate the treasurer's wishes."
In response, Miles issued a statement, which in part read:
"Despite being told by the State's Attorney that there was nothing illegal regarding the government bond purchase I oversaw while Treasurer, Mr. Prenzler completely disregarded that legal opinion and 'stormed' ahead, publicly leveling personal and damaging charges against me, charges that resulted in Madison County Government needlessly spending taxpayer money on legal fees and related expenses. And it is still not over. Mr. Prenzler now wants to spend tens of thousands of dollars for legal counsel in a misguided, futile attempt to seek compensation from one of the country's largest and most respected brokerage firms for a problem he caused."
Prenzler said that at one point last spring, the bonds in question had lost - on paper - over $3.5 million.
"We were fortunate that long-term interest rates declined this spring," he said. "The market gave us an opportunity to exit these risky and illegal investments for a minimal loss, and we took it."
He claims that more than 90 percent of the loss stemmed from bonds purchased after the 2010 election and before he took office on Dec. 1, 2010.
But, Miles claims that brokerage firms anticipate that the step up bonds in question, purchased while he was in office, will be "called" by the government in the near future as a result of interest rate reductions in the bond market.
"In effect, Mr. Prenzler has taken what would have been a significant, positive return for taxpayers and turned it into a substantial loss," Miles stated.