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August 15, 1979

Bradford Securities Processing Services, Inc., Plaintiff,
County Federal Savings and Loan Association, as successor to the First Federal Savings and Loan Association of Utica, New York, Defendant.

The opinion of the court was delivered by: LUMBARD

Bradford Securities Processing Services, Inc., sues County Federal Savings and Loan Association under § 10(b) of the 1934 Securities Act, and Rule 10b-5 promulgated thereunder, for fraud in connection with a series of municipal bond transactions. *fn1"

Plaintiff is the successor to Securities Processing Services, Inc., (SPS), a securities clearing agency founded in 1970 to provide clearing services in municipal bond transactions for its broker/dealer customers. County Federal is successor in interest to First Federal Savings and Loan Association of Utica (First Federal), with whom all the dealings at issue took place. Since the witnesses and documents speak in terms of SPS and First Federal, as the parties were called at the time of the relevant transactions, the court uses these terms throughout.

 In clearing a purchase of municipal bonds by one of its customers, SPS took delivery of the bonds and at the same time paid to the seller or his agent the purchase price agreed upon between the seller and its customer. Since SPS extended credit to its purchasing customers by paying for the bonds when received, it held the bonds as collateral for that advance until its customer requested delivery to a subsequent purchaser. SPS then collected payment upon delivering the bonds to the purchaser and credited the amount to its customer's account. *fn2"

 First Federal was never a customer of SPS but did execute numerous municipal bond transactions through one Bruce C. Bressman, an SPS customer for whom SPS provided clearing services from around April 1, 1974 to September 13, 1974. SPS alleges that their course of trading was fraudulent and ultimately caused SPS the loss of some $ 2,700,000.

 The allegedly fraudulent transactions between Bressman and First Federal involved a type of municipal bonds known as Industrial Revenue Bonds (IDR's). An IDR is issued by a municipality or its agency to attract industry to the municipality. The issuing authority employs bond proceeds to construct a plant site which it then leases to a private manufacturer. The rental payments made by the private firm are used to meet interest payments on the bonds and to retire portions of the principal debt. The IDR bondholder's only recourse for the payment of interest or repayment of principal is the revenue derived from the rental payments or, in the event of default, the properties of the underlying project. Because the soundness of any particular issue is dependent solely upon the success of the underlying project and the credit of the private manufacturer, IDR's generally are more speculative, and pay higher interest than general obligation municipal bonds. Under regulations of the Federal Home Loan Bank Board, IDR's are prohibited investments for a Federal Savings and Loan Association such as First Federal. 12 C.F.R. § 523.10(g)(b).

 First Federal, which in 1974 had approximately 8,000 depositors and assets of 65 million dollars, was located in Utica, New York. Its 10 million dollar securities investment fund was managed by Ernest J. McMurray, its Treasurer. McMurray, a high school graduate with a smattering of college credits, was originally employed by First Federal in 1960 and became successively head teller, Assistant Treasurer, and finally Treasurer in September of 1971. Initially, McMurray's practice was to obtain the approval from First Federal's president before executing any trades in the fund's securities. Later, however, such approval became a mere formality and McMurray exercised unrestricted authority to buy and sell securities on behalf of First Federal.

 McMurray's first contact with Bressman occurred in the fall of 1972, when Bressman, then a municipal bond salesman with J. B. Hanauer & Company of Newark, New Jersey, made a routine telephone solicitation to First Federal. Soon thereafter McMurray began to buy and sell municipal bonds through Bressman on a substantial and regular basis. Their course of trading continued until September of 1974 when it became clear to SPS that a number of the bonds Bressman sold to and repurchased from McMurray, primarily the IDR bonds here in issue, were unmarketable.

 Initially, McMurray's trading with Bressman was profitable for First Federal and was limited to such widely held securities as general obligation bonds of New York City, Philadelphia, California and Texas. In October of 1973, however, after Bressman had moved from J. B. Hanauer to Paragon, Inc. (later Municicorp, Inc.) in Los Angeles, McMurray for the first time purchased IDR's from Bressman which Bressman falsely assured him were permissible investments for First Federal. In the months that followed, the bulk of the McMurray-Bressman transactions were in IDR's, and particularly in four issues which are referred to as OSAGE, ARK VALLEY, MODA and KANAPOLIS bonds and which are the subject of this suit.

 1) OSAGE. These bonds were Series A, 1973 bonds of the Osage Industrial Development Authority of Prue, Oklahoma, full issue par value of $ 3,000,000.

 2) ARK VALLEY. These bonds were Series A, 1972 Water and Sewer Revenue Bonds of the Arkansas Valley Environmental and Utility Authority, Prue, Oklahoma, par value $ 1,510,000, and Series A, 1973 Special Assessment Revenue Bonds (Streets, Curbs and Gutters) of the same Arkansas Valley Authority, full issue par value of $ 840,000.

 3) MODA. These bonds were issued by the Midwestern Oklahoma Industrial Development Authority (Chillcan Series), of Burns Flats, Oklahoma, full issue par value of.$ 1,910,000.

 4) KANAPOLIS. These bonds were Series A, 1972 Natural Gas Revenue Bonds of the City of Kanapolis, Kansas, full issue par value of $ 490,000.

 SPS alleges that each of these bond issues was fraudulent from its inception and of little, if any, intrinsic value. According to SPS, trading in the four IDR's was manipulated and controlled by two SPS customers, Bressman and Hugh J. Bell, who, fully aware of their fraudulent nature, were able through a scheme of round-robin trading to establish an artificial market for the bonds. First Federal was allegedly a knowing or reckless participant in this scheme through its substantial trading in the four IDR's with Bressman.

 Bressman's source for the IDR's and the third leg of the alleged round-robin trading scheme was Hugh J. Bell. Bressman met Bell around June of 1973 when Bell was the principal municipal bond salesman for Stewart Securities, Inc. of St. Petersburg, Florida (Stewart). Bressman and Bell soon began to do substantial municipal bond trading, almost exclusively in IDR's. Stewart had at the time taken over ...

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