Chris Priest’s wrongful termination claim against state Treasurer Ron Crane describes a legal tangle over a securities lending agreement that was cited in a critical 2014 legislative audit of the Treasurer’s office. Such agreements are commonplace, but amid the 2008 financial collapse, they created huge problems for investors, including many states, as the value of securities tumbled. In Idaho’s case, it resulted in a $10 million loss.
As Priest’s claim outlines, Victory Capital, an investment firm subsidiary of Keybank that managed the state’s holdings, for years was allowed under an agreement with the state to lend securities to a third party, taking the cash it received as collateral and reinvesting in other securities. During the pre-crash boom years, the state enjoyed sizable gains. But when the value of those reinvestments tanked, the losses eventually hit the state’s books.
Priest’s claim notes that Victory had violated terms of the lending agreement. In subsequent negotiations with the firm in 2012, Crane, according to the claim, disregarded advice from Attorney General’s Office to retain outside securities counsel on the matter. Instead, he negotiated a confidential agreement “highly favorable” to Victory under which the firm would cover only a small fraction of losses. Priest, in an interview Thursday, said the amount of Victory’s liability was limited to 22.5 percent of the total loss up to a maximum of $3.3 million. The firm ended up covering about $2.8 million in losses. But that was in addition to the $10 million the state lost, Priest said.
But Victory kept working for the state. Under a handshake agreement, Crane had agreed not to pull the state’s business, a condition Victory had insisted on for accepting the loss agreement, according to Priest’s claim. Priest said he learned about the handshake agreement when the state later moved to end securities lending and Victory objected.
After the audit exposed the losses in 2014, Crane told the Statesman the office was getting out of the securities lending business. The state Legislature made sure of that, enacting reforms to rein in investment practices and specifically bar future securities lending. Lawmakers also created an outside five-member Investment Advisory Board to oversee how the Treasurer’s office invested money.
Victory Capital was later sold and neither it nor Keybank still manages state investments. According to Priest’s claim, in 2015 outside lawyers found potential grounds to pursue potential state claims related to wrongdoing by securities ratings agencies whose actions contributed to the financial collapse. But the earlier agreement barred the state from pursuing them.
“That potentially cost the taxpayers millions,” Priest said. “We realized losses, and the whole concept of the settlements and the lawsuits with the underwriters and the ratings agencies was the fact that they misled their investors.”
The Attorney General’s Office Friday said it would not comment on Priest’s claim.
Plaintiffs including states and municipalities, pension funds and other large institutional investors sued and won millions against banks and other entities over fraudulent securities lending practices following the 2008 financial collapse.