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New York Districts May Recoup Investment Losses in Settlement

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The 28 New York school districts that lost investments totaling $40-million when a government-securities dealer declared bankruptcy last spring have tentatively agreed to a settlement that will recoup $17.5 million of their losses.

Additionally, the school districts are in a process of litigation that may provide another $10.5 million against their losses, according to Arthur Olick, the lawyer representing the school districts.

Although the districts may be able to regain up to 70 percent of their lost investments, "nobody is going to come out of this whole," Mr. Olick said last week.

Since last May, when the Lion Capital Group, a government-securities dealer, declared bankruptcy, the New York school districts and others in California and Florida, along with a local government in Alaska, have been engaged in litigation to recoup the losses they incurred when the group went under. (See Education Week, May 23, 1984.)

Repurchase Agreement

The school districts had invested their "idle funds," the extra balances they show on their books until the money is disbursed for district operations, into repurchase agreements, or "repos."

Repurchase agreements are a common method of borrowing and lending money. A school district, for example, lends money to a borrower--like Lion Capital--in return for securities that the borrower agrees to buy back at a later date at a higher rate of return than the district is likely to get through another form of investment.

Such repurchase agreements usually are safe investments, according James P. Rourke, the school-bond advisor for the New York State Education Department, as long as the agreements are "suitably documented and in the third-party hold of a major bank or the Federal Reserve."

Efforts to Recoup Losses

However, the problem school districts encountered with the bankruptcy of Lion Capital last spring was due not to the form of the investment but to the specific details of the agreement.

According to state education officials, the Lion Capital Group met all the requirements established by the state comptroller and the state education department to guide New York school districts in choosing an investment firm.

But when Lion Capital went bankrupt, it was revealed that the firm apparently had used the same government securities as collateral for two loans; one from the school districts and one from the Bradford Trust Company.

The districts have been at odds with Bradford Trust over who actually owns the $47.5 million in assets held by the bankrupt Lion Capital. The two parties have agreed so far only on the $17.5-million payment to the districts.

Mr. Olick said he expects the New York districts to recover additional funds from the limited partners in Lion. The districts have filed a $23-million lawsuit against the partners. Investors in the partnerships include Arthur Laffer, the economist-champion of "supply-side economics."

Comptroller's Advice

At a meeting of the New York State School Boards Association last month, Edward V. Regan, the state comptroller, advised school districts, as he had just prior to the bankruptcy of Lion Capital, to avoid lending money under repurchase agreements.

In addition, he told school administrators that he supports legislation that would provide state funds in the amount lost when investments fail in cases "beyond the control of individual school districts."

Mr. Regan also criticized state policies that have in the past "pressured school district officials to maximize earnings on their investments," such as the 1981 recommendation of a legislative commission that district officials use repurchase agreements to improve investment returns.--cc

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