Negligent Trust Management Leads To Multi-Million Dollar Loss

This case involves an insurance company that put its money into a trust with a depositor that ended up losing its money. The insurance company had a fronting agreement with a depository company. Part of the deal included the bank holding collateral in a trust account. As initially funded, the trust account had about $25 million in securities and cash. The depositor of the trust account then swapped out good securities for junk bonds. Because of this, the beneficiary of the trust needed to pull funds to defray losses from the fronting arrangement. Since the bank swapped out the good for bad, the insurance company had to take the loss.

Question(s) For Expert Witness

1. Please describe your experience as a bank trust officer for insurance companies.

2. What are the fiduciary duties of a banking trust in a fronting arrangement?

3. In what scenario is it acceptable to swapped out good securities in a trust under this type of agreement for junk bonds?

Expert Witness Response E-033509

I have worked at both an insurance company and a bank trust department. For 10 years, I served as the corporate vice president of an insurance group where I oversaw equity and private placements of over $125 million. I then worked as the director of securities regulation and as an appointed trustee of the investor protection trust for a northeastern state. Fiduciary power in this instance is not defined by explicit law but by case law. Swapping good collateral for so-called junk bonds was not prudent. The officer should have received explicit authority in written form from the beneficiary.