WASHINGTON – Two groups of municipal bondholders are separately suing and seeking monetary damages from Bank of Oklahoma Financial, alleging it failed to be a responsible trustee to holders of conduit bonds that involved fraud by the borrower.
One group of investors filed their complaint as a class action in the U.S. District Court for the Northern District of Oklahoma, located in Tulsa, Okla. The group is seeking a jury trial and compensatory damages in excess of $5 million.
The other group brought its suit in the Tulsa District Court and is seeking a yet-to-be-determined amount of actual damages along with exemplary damages of no more than $5 million.
Both groups of investors say 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 commingled bond revenues pledged to specific facilities.
The lawsuits are connected to several Securities and Exchange Commission actions, one of which involved Christopher Brogdon, the Atlanta-based businessman the SEC charged with committing fraud in financings for at least 43 nursing homes and other entities he owned or controlled. The commission said he falsely claimed in bond offering documents that investors would receive interest from the 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 New Jersey federal court judge, in a January 2016 order, required Brogdon to create a plan to pay $85 million to the harmed investors.
Another related SEC case, which is still in progress, alleges that Dwayne Edwards purchased a number of Brogdon's facilities and engaged in similar conduct to Brogdon after frequently meeting with him and using many of the same deal participants, including BOKF, that Brogdon used in his fraudulent financings. The SEC alleges that Edwards improperly commingled funds from nine different conduit municipal bond offerings totaling nearly $62 million as well as revenues from the facilities financed by the offerings. The bond proceeds were supposed to be used to finance assisted living or memory care facilities in Georgia and Alabama, but Edwards used some proceeds for personal gain.
BOKF faced SEC action and settled for $1.6 million in September 2016 over charges that it helped to conceal numerous problems and red flags from holders of the various conduit bonds while it was acting as trustee.
The class action filed in Oklahoma's Northern District names eight plaintiffs with a total of $404,563 invested in offerings connected to Edwards but it is estimated to include "well in excess of 1,000 individuals who reside across the United States," according to the lawyers who filed the complaint. While the eight named plaintiffs do not own bonds directly tied to Brogdon's offerings, Randall Calvert, an Oklahoma City-based lawyer representing the class, said that some class members other than those eight have investments in Brogdon's offerings.
Leah Harper, vice president of corporate communications for BOKF, said the bank believes the lawsuit "is without merit" and "misrepresents the facts in the matter."
"The bank fulfilled all of its obligations as trustee for the Dwayne Edwards bonds in a timely fashion, provided prompt notices to the market, and took prompt action to protect the bondholders," Harper said. "We intend to vigorously defend this lawsuit and believe we will prevail."
The class of plaintiffs is meant to include "all persons and entities that purchased, or otherwise acquired, conduit municipal bonds" sold by entities Edwards and his business partner Todd Barker controlled and for which BOKF served as trustee.
Calvert wrote in the complaint that BOKF failed to notify existing or prospective investors of various violations, material misrepresentations, and omissions that it was aware Edwards was committing. BOKF, as trustee, had, among other things, a duty of care as well as to preserve the assets of the bonds in the trust and to disclose all material facts that it knew might affect bondholders' rights, he wrote.
"Importantly, defendant BOKF was well aware of the wrongdoings perpetrated by Brogdon, but it never notified investors that Edwards and Barker were purchasing these facilities out of the Ponzi-like scheme created by Brogdon," Calvert wrote. He added that BOKF "plainly violated its fiduciary duties by overlooking obvious red flags and helping other commit fraud, conversion, and breach of fiduciary duty."
The class action cites seven causes of action against BOKF, including aiding and abetting fraud, gross negligence, civil conspiracy, breach of fiduciary duty, as well as aiding and abetting breach of fiduciary duty.
The lawsuit in Tulsa District Court involves one Nevada-based company and 20 plaintiffs who each have investments in various conduit bonds that are connected to Brogdon. The plaintiffs collectively hold roughly $3.37 million in the fraudulent bonds, according to their filing. They contend they suffered from BOK's concealment of the fraudulent activity and what they said was the bank's "reckless disregard of the rights of bondholders."
BOKF has submitted a motion to stay the proceedings in state court and has an April 11 hearing scheduled on that request.