Charity sues Sun Trust Bank Over Alleged Risky Investment
The Atlanta-Journal Constitution newspaper reports that “[a] nonprofit organization[, The Hudgens Foundation,] founded by the late . . . developer Scott Hudgens is suing SunTrust Bank, claiming the Atlanta bank failed to properly disclose the risks when it invested $8 million of the charity’s money in a complex type of security.” According to the newspaper, “[t]he investment, which took place in 2005, involved auction-rate securities, a kind of debt long billed by the financial industry as a safe place to park money while earning interest — cash with benefits, so to speak.”
The market for the securities dried up in the financial crisis, and the nonprofit is left holding the $8 million in non-interest bearing account that doesn’t mature for 35 years. The article further reports that in 2007 the nonprofit listed about $27 million in assets. As a consequence, the non-liquid $8 million is a sizable portion of the assets of the nonprofit. Below is a further excerpt of the story:
The foundation “didn’t want to just keep that much money sitting around in a savings account,” Jones said. “They wanted to have a higher return, but also wanted to have liquidity, to be able to get to it whenever they needed it.”
The $8 million is no small chunk of change for the charity. The foundation reported $29 million in assets in 2007, the most recent year that data was available.
According to the foundation’s lawsuit, SunTrust said the securities were a “safe conservative investment and a cash equivalent that would produce a better return than money markets with minimal risk and no loss of liquidity.”
The lawsuit also claims SunTrust didn’t disclose to the foundation the growing risk of auction-rate securities until the market for them had failed.
SunTrust said it did nothing wrong.
“We handled this account appropriately and will vigorously defend against any action brought by the Hudgens Foundation,” said Hugh Suhr, a SunTrust spokesman.
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AMT