A nonprofit organization founded by the late Gwinnett County 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.
The 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.
But the market for these securities evaporated during the global financial crisis, making it virtually impossible for groups like the Hudgens Family Foundation to sell any of their holdings.
The $8 million remains locked up, not maturing for about 35 years, said Craig T. Jones, one of the foundation's attorneys.
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.
Hudgens, who died in 2000, was one of Gwinnett's premier developers, helping the county grow from a largely rural outpost to the booming, bustling suburb it is today. He built Gwinnett Place Mall in Duluth and the sprawling Mall of Georgia in Buford, as well as other malls in metro Atlanta and around the state.
He also was a leading philanthropist, giving money during his lifetime to the Gwinnett Children's Center and the Children's Art Museum. Hudgens created the charitable foundation a year before he died.
Today, the Hudgens name graces numerous buildings and facilities across the county. The lengthy list includes the Hudgens Center for the Arts in Duluth, the D. Scott Hudgens Center for Skilled Nursing in Suwanee, and the Hudgens Early Education Center on the campus of Gwinnett Technical College.
After his death, SunTrust was named executor of Hudgens' estate, said Jones, the foundation's attorney. The bank invested in the auction-rate securities in its role as executor, he said.
Auction-rate securities are long-term debt instruments with variable interest rates set by frequent, regular auctions, hence the name. Organizations holding the securities could sell at auctions that took place every seven to 35 days.
But institutional investors that had been buying up the securities began dropping out of the market amid the subprime mortgage mess and subsequent recession, causing auctions to fail.
Industry regulators have cracked down on many of the financial firms that sold auction-rate securities, including SunTrust.
Last September, SunTrust paid nearly $2 million in fines and agreed to buy back some securities it had sold.
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