Customers of Bevill, Bresler & Schulman Asset Management Corp. were scrambling to locate their securities Tuesday, a day after the firm collapsed and was charged with fraud by the Securities and Exchange Commission.
Many of the firm`s clients, including eight savings and loans and banks in Illinois, apparently believe that the securities are being stored safely for them at Security Pacific Clearing & Services Corp. in New York.
However, the SEC has said they may face losses totaling more than $140 million because the firm is unable to meet obligations as they come due.
Great American Federal Savings & Loan Association of Oak Park, listed in court papers as the biggest unsecured creditor, said it hadn`t yet found the $39.2 million in securities it was told were being held in safekeeping. However, ”We have no reason to believe this organization will incur any losses,” said Ralph Bellon, treasurer.
”We don`t know if we`re in a good position or a bad position,” said a spokesman for the U.S. Army, whose central banking and investment fund had loaned Bevill Bresler $11 million and is listed as the fourth-biggest creditor. The fund makes short-term investments for the Army`s morale support fund, a self-supporting fund used to finance recreational activities.
In Newark, U.S. District Judge Dickerson Debevoise froze the assets of Bevill Bresler and two related firms–Bevill Bresler & Schulman Government Securities Inc. and BBS Government Securities Group Inc.–and appointed Saul S. Cohen, a New York lawyer, as a trustee for Bevill Bresler and receiver for the other firms. The judge also froze the personal assets of five officers of the firms.
A spokesman said Security Pacific Clearing, a unit of Security Pacific Corp., a Los Angeles bank holding company, turned over records Monday to the trustee. He said Security Pacific held securities in segregated accounts for customers of Bevill Bresler, but he declined to comment on the value of the securities in those accounts.
The Federal Home Loan Bank Board said it was looking into potential losses of federally insured thrifts in the wake of the Bevill Bresler collapse.
Bevill Bresler, based in Livingston, N.J., filed for protection Monday under Chapter 11 of the federal Bankruptcy Code. The SEC contested the filing in federal court in Newark, charging the firm with fraud and urging that a receiver be appointed.
The incident comes only a month after the failure of E.S.M. Government Securities Inc., of Ft. Lauderdale, Fla., which left customers with losses estimated at more than $300 million. E.S.M.`s demise also forced the closing of Home State Savings Bank of Cincinnati and prompted Ohio`s governor to shut temporarily 70 other S&Ls whose deposits were insured by a private fund.
Like E.S.M., Bevill Bresler firm dealt in repurchase agreements, short-term transactions under which a dealer sells securities with a pledge to buy them back later at a higher price that includes an interest charge. Repos, as they`re called, are in effect loans backed by government securities as collateral. In the opposite transaction, called a reverse repo, a dealer lends money and receives securities as collateral.
The incident also seems to resemble the E.S.M. matter in that many customers apparently didn`t take possession of the securities that were pledged as collateral, which they are now seeking.
There are a number of firms bearing the BB&S name. The biggest is Bevill, Bresler & Schulman Inc., a broker-dealer with 25,000 customers that is registered with the SEC and reports monthly to the Federal Reserve Bank of New York. Bevill Bresler, a subsidiary of BBS Government Securities, wasn`t registered.
Ira Sorkin, regional administrator for the SEC, said the agency, which had requested that the broker-dealer also be placed in receivership, was currently examining its books and records.
The SEC charged that customers were misled as to which of the companies they were doing business with. According to a complaint filed by the SEC, losses in the ”multimillions” of dollars in the account of Bevill Bresler Government Securities were financed by Bevill Bresler, the firm in bankruptcy proceedings.
The complaint said customers believed their securities were being held in safekeeping, while in fact ”such collateral was converted for Bevill Bresler and/or Bevill Bresler Government Securities` purposes.” The SEC alleged that Bevill Bresler failed to disclose that its ability to meet obligations to customers might be impaired by a $65 million loan to an affiliate.
Great American said it had put in requests to both Bradford Trust Co. of New York and Security Pacific Clearing for the $39.2 million in government securities that it bought from Bevill Bresler.
A spokesman for Bradford said that as of March 9 the firm stopped acting as clearing agent for Bevill Bresler and that the business was transferred to Security Pacific Clearing. Besides the customer accounts, Security Pacific has said it holds ”substantially in excess” of $30 million to back a loan it made to Bevill Bresler.
Great American has 23 branch offices and is the eighth largest S&L in Illinois, with assets of $1.2 billion and reported net worth of $34 million. A spokesman said there were no signs that depositors were becoming panicky but that there had been a number of calls from depositors seeking assurance that their deposits were federally insured.
All S&Ls in Illinois that do business with the public must belong to the Federal Savings & Loan Insurance Corp., which insures deposits up to $100,000. Other Illinois S&Ls listed as unsecured creditors are First Federal S&L, Freeport; Peoples S&L, Streator; Bushnell Federal S&L, Bushnell; Fidelity S&L, Berwyn; and Lincoln-Way Federal Savings & Loan, New Lennox. Illinois banks listed as unsecured creditors were First National Bank of Skokie and Southern Illinois Bank, Fairview Heights.
Officials at First Federal of Freeport, listed as one of the top 10 creditors, with an amount of $6.2 million, didn`t return repeated telephone calls.
Ronald C. Christmann, secretary of Peoples S&L, said his association believed the collateral behind their $2.8 million exposure from reverse repos with Bevill Bresler was secure, ”so we won`t suffer any loss; the only thing we can do is contact them to try to run down the collateral.”
A spokesman for the Illinois commissioner of savings and loans said he was sending an examiner to Peoples, the only state-chartered S&L affected by the collapse.
Robert Sharfman, an attorney for Fidelity Federal, said the S&L was dealing with the broker-dealer, not Bevill Bresler, and had been assured that the $3 million in collateral it had put up in a reverse repo was being held at Security Pacific. ”I`m not in a cold sweat right now,” he said.
Officials of Bushnell and Lincoln-Way couldn`t be reached for comment.
Officials of Southern Illinois Bank refused to comment. John Treston, first deputy commissioner of banks in Illinois, said state bank examiners were sent Tuesday to Southern Illinois Bank in Fairview Heights to assess the situation.
Erman G. Kramer, chairman of First National Bank of Skokie, said his bank had a repo with Bevill Bresler for $1 million. He said he believed the bank was covered, ”but if there was fraud, we wouldn`t know where our security is.” Two other Illinois-based firms listed as creditors were Broker`s Capital of Chicago and Midwest Government Securities Inc. of Glen Ellyn.
Other institutions across the nation that were listed among the top five creditors said they had been told previously by Bevill Bresler that their collateral was safe. Ft. Lee Savings & Loan, of Ft. Lee, N.J., said it believed its $19.2 million in securities were being held in safekeeping at Security Pacific.
Of the various firms that carried the BB&S names, only the registered broker-dealer released audited financial statements. They were audited by Frederick Todman & Co. of New York.
Partners at Todman refused to identify themselves or comment on the case, referring all inquiries to the firm`s attorney, who did not return repeated telephone calls.
