By Mark Maremont And Leslie Scism
US Bancorp was sued by a South Carolina insurer for allegedly
failing to prevent $176 million of the insurer's funds from being
replaced with illiquid or worthless assets, in the latest fallout
from a scandal involving 28-year-old financier Alexander Chatfield
Burns.
In the lawsuit, filed Friday in a federal court in Columbia,
S.C., Companion Property & Casualty Insurance Co. claimed that
the bank's US Bank unit, which served as trustee for trust accounts
being managed by Mr. Burns's companies, negligently or recklessly
allowed them to be "depleted" in favor of securities that are
"illiquid and appear to have little or no value."
"We are still evaluating the complaint that was just filed," a
US Bank spokesman said. "However, we can say that we strongly deny
the allegations being made against US Bank and we intend to defend
ourselves vigorously through the legal process."
Insurance regulators in Delaware and Louisiana seized two of Mr.
Burns's insurers last year because of concerns about the quality of
their assets. Mr. Burns's private-equity firm allegedly had
siphoned off hundreds of millions from several insurers that he
controlled or whose accounts he managed, replacing them with
unusual holdings including rights to a purported Caravaggio
painting, according to filings in the Delaware liquidation
matter.
Mr. Burns, the focus of a Saturday page one article in The Wall
Street Journal, has said he believes his firm "complied with all
relevant laws." He resigned from his firm last year and hasn't been
accused of any wrongdoing in any criminal or civil proceeding.
Companion had a so-called fronting arrangement with two insurers
controlled by Mr. Burns, under which those insurers assumed risk
from policies issued by Companion, for a fee. To ensure that they
would make good on their obligations, the insurers established
collateral trust accounts for the benefit of Companion.
As trustee, the lawsuit claims, US Bank was responsible for
ensuring that any substituted assets in the accounts were of
"comparable value" to those they replaced, and for providing
monthly statements certifying that the fair-market value of the
assets in the accounts was "true and correct."
By early 2014, the complaint says, investments in "reputable
bond companies such as PIMCO" had been sold and replaced by
investments in obscure entities with little or no value.
Many of the new holdings were identical to those found on the
books of Freestone Insurance Co., a Delaware insurer now in
liquidation that was controlled by Mr. Burns.
About $86 million of Companion's trust money was invested in
entities whose main assets are rights to the purported Caravaggio
painting, according to exhibits filed with the new lawsuit and
documents in Delaware Chancery Court.
Companion, which had been owned by Blue Cross Blue Shield of
South Carolina, was sold early this year and renamed Sussex
Insurance. Before being sold, Companion posted a loss of $113
million after ending its dealings with Mr. Burns's former
companies, its regulatory filings show.
"The trustee appears to have had the duties outlined in the
complaint," said Talcott J. Franklin, an expert on trust law who
has litigated a number of cases involving the duties of
trustees.
He said the lawsuit is in early stages, but if the allegations
are proven, US Bank "could be liable for the plaintiff's lost
profits" and potentially to treble damages under South Carolina
law.
Write to Mark Maremont at mark.maremont@wsj.com and Leslie Scism
at leslie.scism@wsj.com
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