LandAmerica seeks probe of banks

LandAmerica Financial Group Inc. is readying to battle some banking giants over investment advice the title insurer now claims led to its undoing.

Attorneys for the bankrupt Henrico County-based company have asked to hire a New York law firm to investigate and pursue claims that the company was misled when investing in auction-rate securities. A hearing on the request is scheduled Thursday in U.S. Bankruptcy Court in Richmond.

LandAmerica says the securities were marketed by the financial institutions "as highly liquid and safe alternatives to cash."

But auctions for these securities failed in February, essentially blocking subsidiary LandAmerica 1031 Exchange Services Inc. from access to $201.7 million in money that it took in and invested.

Nine months later, parent and subsidiary companies filed for Chapter 11 bankruptcy protection.

The exchange company's "ability to sell, or borrow against, these securities ultimately precipitated its decision to cease additional customer transactions, terminate operations and file its Chapter 11 case," the company said in a court filing.

Attorneys for LandAmerica did not return calls for comment.

Before the crash, auction-rate securities were considered highly liquid because auctions to buy and sell them happened often, sometimes weekly or monthly, said John A. Weinberg, senior vice president and director of research at the Federal Reserve Bank of Richmond.

But the periodic auctions failed in February. No buyers meant the investors "who wanted to get out, couldn't," he said.

The exchange company acted as a third party for investors who sold property and wanted to defer capital-gains taxes. If the proceeds were reinvested within 180 days, the taxes were deferred.

When LandAmerica Exchange Services took in money, much of it ended up invested in auction-rate securities, which earn interest.

LandAmerica's request to hire the New York law firm does not name the financial institutions that would be the focus of any probe, but bankruptcy filings provide a glimpse into the company's investment activity.

At the time of the filing, LandAmerica had $201.7 million invested in auction-rate securities. SunTrust Robinson Humphrey held $81.4 million, while Citigroup Inc.'s Smith Barney unit had $120.3 million, bankruptcy records show.

SunTrust Robinson Humphrey is the investment banking arm of Atlanta-based SunTrust Banks Inc., the fourth-largest bank by deposits in the Richmond area. It also is one of the top 10 private employers in the region.

SunTrust spokesman Hugh Suhr declined to comment on the LandAmerica case.

Robert L. Brace, a California attorney representing exchange customers in a $330 million class-action lawsuit against SunTrust and two LandAmerica executives, said that requesting to hire the law firm is a positive step.

The exchange company's "sole obligation at this point is to make sure its creditors get paid back," Brace said.

SunTrust has come under fire relating to auction-rate securities in the past. The Financial Industry Regulatory Authority, an independent securities regulator under Securities and Exchange Commission oversight, is investigating SunTrust's involvement in how auction-rate securities were marketed, spokesman Herb Perone said.

Last year, the regulatory authority announced that it had an informal settlement agreement with SunTrust to make whole some individual investors and nonprofit groups. Part of the settlement would have involved corporations, pension plans and trusts that invested less than $10 million. The bank stepped away from the agreement before it became final.

"We have already bought back auction-rate securities from substantially all of the clients who would have been covered by the preliminary settlement," Suhr said. "However, we have not been able to come to an agreement on other terms."

The regulatory group has resumed its investigation of SunTrust, Perone said.

Bankruptcy Judge Kevin R. Huennekens is scheduled to hear the request from LandAmerica to hire New York law firm Quinn Emanuel Urquhart Oliver & Hedges LLP, which is litigating a $60 million auction-rate securities claim for Palm Inc. against Merrill Lynch.

Richard I. Werder Jr. of Quinn Emanuel declined to comment until after a ruling.

Contact Emily C. Dooley at (804) 649-6016 or .

Staff Writer Carol Hazard contributed to this report.