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HARRISBURG
PATRIOT-NEWS
Judge's ties to case questioned
Bush nominee had assets in bank involved
with Black
Wednesday,
February 20, 2002
By
Brett Lieberman
Of Our Washington
Bureau
WASHINGTON--A federal judge who oversaw part of the trial
of money manager John Gardner Black, whose risky investments
cost Pennsylvania
school districts $71 million, had as much as half his assets
in a bank at the center of the case. His wife was also a senior
officer at the bank.
Judge D. Brooks Smith, whom President Bush nominated to the
U.S. Court of Appeals for the Third Circuit, issued 15 rulings,
including some that may have benefited Mid-State Bank and
helped keep it solvent.
The orders included freezing money that the
Northern Lebanon
School District
and other districts invested in Mid-State, as well as other
districts' funds that were invested elsewhere.
If the orders had not been overturned, losses caused by Black's
mishandling of the investments could have been spread out
among a larger pool of school districts and municipalities
while minimizing the bank's exposure.
Had that occurred, schools would have had to absorb $37 million
of the $71 million lost.
Instead, Mid-State and its parent, Keystone Financial Inc.,
eventually set aside more than $51 million to pay for the
losses and its stock lost more than 50 percent of its value.
Schools recouped most of their money through lawsuits against
Mid-State, Black and other financial advisors.
Northern Lebanon recovered nearly all the $25
million from its building fund that was at risk.
Black was sentenced to 41 months in federal prison for concealing
the losses.
Smith's financial disclosures at the time showed assets including
$100,000 to $250,000 worth of stock in Keystone Financial
Inc. None of his other assets was worth more than $50,000
each.
Smith eventually recused himself from the case, citing a
potential conflict because his wife's post at the bank "could
cause a reasonable observer to question the impartiality of
the undersigned judge."
He never revealed his assets in Mid-State stock.
He recused himself after former Gov. Richard Thornburgh,
who was appointed trustee in the case, brought the potential
conflict to his attention. Legal ethicists said Smith should
have removed himself from the case immediately.
"This was a serious and inexplicable decision on the
judge's part," said Steve Lubet, a legal ethicist at
the Northwestern University School of Law.
Calls to Smith's chambers in Johnstown
were referred by a clerk to the Justice Department,
where a senior official said Smith handled the situation with
an "excess of caution" and his rulings did not affect
the case or Mid-State.
"The key here was that there was no conflict of interest,"
the official said. The bank, he said, was "mentioned
in passing" and was not part of the fraud.
It was unclear at that time that Mid-State could be liable
for millions of losses by the school districts, he said.
Yet attorneys involved in the case said it was obvious from
the start that Mid-State failed in its fiduciary responsibility.
School districts had already said that they were going to
sue Mid-State to recoup losses and Thornburgh had moved frozen
funds to PNC Bank because of concerns over Mid-State's role.
Mid-State and all the accounts that Black used at the bank
was mentioned prominently in the initial complaint that the
Securities and Exchange Commission filed on Sept. 26, 1997
. Another SEC filing mentions the bank 66 times.
"Those two things together should have been a red flag
that the bank is more than a passive participant in Black's
fraud," said Doug Kendall of the Community Rights Counsel,
a non-profit, public-interest law firm in
Washington .
The Senate Judiciary Committee is scheduled to hold a hearing
on Tuesday where Smith is likely to be questioned on his handling
of Black's case.
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