WASHINGTON – Bondholders suing Bank of Oklahoma Financial claim the bank had conflicts of interest and did not perform its duties with due care when serving as trustee for transactions financing senior housing projects in which proceeds were allegedly illegally commingled and used.
They are asking a federal judge to deny the bank's argument that it shouldn’t have to pay the bondholders because it acted properly within the limited scope of its trust indentures.
The ten bondholders making the claim are those named in a class action pending before Judge John Dowdell of the U.S. District Court for the Northern District of Oklahoma in Tulsa. The total number of plaintiffs in the class could include in excess of 1,000 individuals, said Randall Calvert, an Oklahoma City-based lawyer representing the bondholders. They are seeking more than $5 million in compensatory damages.
The class action alleges that BOKF, while acting as trustee for certain offerings, kept material facts from investors like draws on debt service reserve funds, failures to replenish those funds, and the commingling of bond revenues pledged to specific facilities.
BOKF defended itself in an April motion to dismiss, saying the complaint ignored the fact that the bank was only bound by its trust indentures for the six muni bond issues in question. The bank maintained that it sent notices to bondholders and took actions in a timely way to protect the bondholders’ interests.
The class members, in their response filed this week, said that while the bank may be focused on its indenture duties, the complaint’s arguments are based on the “extra-contractual duties that the law imposes upon BOKF as indenture trustee,” namely the duty to avoid conflicts of interest and the duty to perform basic non-discretionary, ministerial tasks with due care.
The senior housing projects are tied to Christopher Brogdon, an Atlanta-based businessman the Securities and Exchange Commission charged with committing fraud in financings for at least 43 nursing homes and other entities he owned or controlled, as well as Dwayne Edwards, who the SEC found purchased a number of Brogdon’s facilities and continued Brogdon’s fraudulent conduct. The SEC found that Brogdon falsely claimed in bond offering documents that investors would receive interest from revenues generated by the projects in which they thought they were investing. Instead, Brogdon commingled investor funds and used the money for personal expenses and business ventures.
A federal judge in New Jersey required Brogdon to repay $85 million to investors. Edwards is in preliminary settlement talks with the SEC, according to court documents in that case. BOKF settled with the SEC in September 2016 for $1.6 million without admitting or denying the SEC’s findings that it helped to conceal numerous problems and red flags from holders of the various conduit bonds while it was acting as trustee.
The bondholders’ response to the motion to dismiss the charges against BOKF focuses in part on the bank's alleged actions while Edwards was purchasing some of Brogdon’s troubled facilities. Edwards kept many of the deal participants Brogdon had used for his offerings in place during subsequent offerings.
The class participants argue that BOKF agreed to be indenture trustee for the Edwards offerings “to protect the other fraudulent players in Brogdon’s Ponzi-like scheme and in expectation of receiving additional trusteeships” from Brogdon and the participating underwriter. They also allege that BOKF aided Brogdon’s and Edwards’ fraudulent conduct “in hopes that the proceeds from the Edwards offerings would pay off Brogdon’s outstanding bonds – forever resolving and concealing the misdeeds of Brogdon and the collusion of BOKF.”
“BOKF placed its own interests … over those of the plaintiffs and the proposed class,” the lawyers for the class members wrote. “Its involvement with Brogdon and [the underwriter] had thus created a classic, unwaivable conflict of interest with those who would be investing in Edwards offerings.”
The ministerial duties BOKF was responsible for but failed to carry out, according to the bondholders, included: obtaining and reviewing the borrower’s financial information; ensuring compliance with the terms of the offering documents; notifying investors of any noncompliance or violations of the terms of the offering documents; and declaring a default in appropriate circumstances.
BOKF raised other legal objections, including that several of the plaintiffs’ claims should be dismissed because they aren’t recognized in Alabama and Georgia, where some of the senior living facilities are located.
The class participants argue that BOKF was misreading the law in contending that just because a state’s highest court hasn’t yet recognized a certain cause of action, any claim asserted based upon that theory would have to be dismissed. Instead, the plaintiffs’ said the real test, which their claims would meet, is whether a state’s highest court would recognize the cause of action if it were presented.