Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Within months of his mother’s death in 1995, a young heir of twin trusts that Atlanta’s oldest bank had managed for more than six decades began voicing concerns about the trusts’ “heavy concentration of Coca-Cola stock.” Concentrations of Coke stock that sometimes made up as much as 90 percent of the trusts’ assets represented an unacceptably high level of risk, Alexander C. Hitz complained in a series of letters to a president at SunTrust Banks Inc. Bank executives ignored Hitz’s pleas to diversify the trusts he and his half brother, Thomas L. Shaw, had inherited from their mother, according to a federal suit in Atlanta and a companion counterclaim in Fulton County Superior Court. Throughout the 1990s, Coke stock continued to increase in value, peaking at $88.94 a share in 1998. But a year later, the stock began a precipitous slide from which it has yet to recover. The stock closed Thursday at $42.89. SunTrust’s failure to diversify the family trusts’ assets until Coke stock had dropped to half its 1998 market value has prompted the claims against the bank by Hitz and Shaw — the sons of Caroline Sauls Hitz Shaw and internationally renown choral director Robert Shaw. At stake are millions of dollars in claimed losses sustained by the trusts, which have been managed by SunTrust and its predecessor, Trust Co. of Georgia, since H. Cliff Sauls — a prominent Atlanta physician — established them more than 60 years ago. The $165 million federal suit by Sauls’ grandsons is more than just a fight over money. The suit raises questions about the bank’s decades-old relationship with The Coca-Cola Co. — one of its largest and oldest clients — and bank executives’ ability, given SunTrust’s own extensive Coke holdings, to manage fairly and impartially its clients’ trust portfolios. The suit also will likely test the limits of attorney-client privilege between King & Spalding and its longtime clients Coke and SunTrust, as it attempts to examine the two companies’ interlocking relationships. King & Spalding is not a party to the suit, and SunTrust has hired Powell Goldstein to defend the bank. But the bank has identified two King & Spalding partners in the firm’s trusts practice — both of whom were involved in managing the Sauls trusts — as witnesses in the case. Like the Sauls trusts, other trusts that SunTrust manages are loaded with Coke stock — more than 68 million shares, according to court pleadings. In addition to its trust holdings, SunTrust owns 48,266,496 Coke stock shares worth more than $2 billion, according to SEC filings and court pleadings. With dividends of 25 cents a share per quarter last year, SunTrust’s own Coke holdings generated more than $48 million in revenue for the bank in 2004. Together, the bank’s corporate and trust holdings total more than 116 million shares of Coke stock, making it among the soft-drink corporation’s largest shareholders. In 2004, SunTrust held or issued approximately $173 million in loans to Coke or Coke affiliates, according to SEC filings. Coke and SunTrust executives have sat on each other’s boards for decades. SunTrust and Coke also share the same law firm, King & Spalding, where they are numbered among the firm’s most prominent clientele. Lawyers affiliated with King & Spalding traditionally have sat on Coke’s board and occasionally have filled the post of general counsel. Former U.S. Sen. Sam Nunn, appointed to Coke’s board while he was a King & Spalding partner, has remained a board member since leaving the law firm in 2003. John T. Marshall, a partner at Atlanta’s Powell Goldstein, referred questions about allegations in the federal suit to SunTrust spokesman Barry Koling. “Obviously, we believe the initial allegations are unfounded,” Koling said last week. “But there is a proper forum for resolution of these issues. We look forward to resolution taking place in that forum. … The facts show we have acted the way we should have.” RELUCTANT TO DIVERSIFY? In the federal suit, filed in May, Hitz and Shaw claim that SunTrust hid from them the extent of its financial ties to Coke. Hitz and Shaw have made similar allegations in a counterclaim to a suit SunTrust filed against the Sauls heirs in March in Fulton Superior Court. In that suit, the bank has sought to resign as trustee of all of the Sauls trusts except for those in which Laura Wallace, Hitz’s and Shaw’s maternal aunt, is named as the prime beneficiary. When the trusts were created in 1938 and 1942, the assets were composed primarily of Coke stock, according to the federal suit. In recent years, between 66 percent and 90 percent of the trusts’ assets have been invested in Coke stock, according to the suit. Hitz and Shaw claim that SunTrust’s extensive Coke holdings made it reluctant to diversify the trusts’ portfolios. “SunTrust is unable to evaluate whether to sell the beneficiaries’ shares of Coca-Cola stock without considering whether it must sell the Coca-Cola stock in all such trusts. Such a massive sale undoubtedly would create a downward market pressure that, in turn, would adversely affect SunTrust’s own investment in Coca-Cola,” the plaintiffs say in court pleadings. SunTrust “is subject to the natural temptation to retain all 68 million shares of Coca-Cola stock that it holds in a fiduciary capacity, in order to protect the value of the 48 million shares that it holds for its own account,” according to the federal complaint. Add to that the presence of Coke executives and former executives with significant shares of Coke stock on SunTrust’s board — to which the bank’s management must answer — and there exists the makings of a fiduciary conflict of interest, the federal suit alleges. In court pleadings, SunTrust lawyers have asserted that there is “no conflict of interest arising out of SunTrust’s relationship with Coca-Cola.” FROM $89 A SHARE TO $45 Shortly after their mother’s death in 1995, Hitz and Shaw inherited her beneficiary status and began receiving distributions from the trusts that their grandfather had established for his wife and daughters. In 1999, after the death of Shaw’s father, the trusts were split into eight sub-trusts in order to provide Hitz and Shaw with an annual income based on a percentage of the trusts’ annual market value. According to the federal suit, Hitz — already pressuring SunTrust to diversify trust assets — became even more concerned after Coke stock prices peaked in July 1998 at nearly $89 a share. But SunTrust executives ignored his urgent requests to diversify the trusts’ holdings, the suit alleges. Within a year of that record stock high, Coke experienced a historic management upheaval. In December 1999, Douglas Ivester, then Coke’s chairman and CEO and a SunTrust board member, retired suddenly. In an unrelated securities fraud suit pending against Coke in federal court, stockholders claim that Ivester was fired, his departure orchestrated in an emergency secret meeting of Coke’s board of directors the day before he announced he was stepping down. By then, Coke had been forced to suspend sales in Europe and recall $75 million worth of soft drinks following a contamination scare. It had agreed in principle to settle a highly publicized race discrimination suit for $192 million. And top Coke executives, according to the securities suit, had attempted to mask the company’s faltering financial performance in 1998 and 1999 by secretly pressuring Coke bottlers to purchase $600 million worth of unwanted soft-drink concentrate. In January 2000, Coke stunned Wall Street with its announcement that it intended to lay off an estimated 6,000 employees worldwide. Coke stock plunged to around $45 a share — about half of its 1998 value, slashing the value of the Sauls trusts, according to the suit. On March 20, 2001 — with Coke shares still hovering around $45 — Hitz wrote in a letter to SunTrust First Vice President Dameron Black: “Thomas and I have long been troubled by the heavy concentration of Coca-Cola stock in the [trusts].” Five days later, Black replied that he was “surprised by the tone” of Hitz’s letter and defended the Coke investments, according to the federal complaint. “The legacy of the Coca-Cola investment has served the trusts well. … Over time, Coca-Cola’s financial strength and ability to generate above-average growth in profits and dividends has resulted in substantial appreciation,” the reply said. In other correspondence, SunTrust executives repeatedly assured Hitz that Coke stock would “come back,” the federal suit claims. But when the stock continued to lag in value, Hitz and Shaw had to draw on the principal to supplement trust incomes that previously had been derived from quarterly earnings. The actual value of the Sauls trusts is, at this point, a matter of some debate. In their federal complaint and Fulton countersuit, Hitz and Shaw have claimed $15 million in losses as a result of SunTrust’s alleged mishandling of their grandfather’s trusts. But in accountings SunTrust filed in the Fulton suit, the bank valued the two original Sauls trusts, before they were divided into eight smaller trusts in 2000, at $3.08 million. The federal suit alleges that SunTrust’s totals are based on the “inventory value” (derived from the original cost or purchase price) rather than the “market value” (based on the current sales price) of the trust stocks, a claim that SunTrust acknowledged in its answer to the federal suit. SunTrust also acknowledged in court pleadings that quarterly distributions to the trust beneficiaries and the bank’s management fees were based on the market value of the stocks contained in the Sauls trusts. The trusts had a market value of about $20 million on Dec. 31, 1999, according to the suit, and provided Shaw with annual income of $146, 874. Hitz’s trust income was $154, 776. KING & SPALDING’S PRESENCE Noticeably absent from the court pleadings is King & Spalding, the firm so closely linked to Coke and SunTrust. Asked why SunTrust has turned to Powell Goldstein for legal help this time, SunTrust spokesman Koling said, “I wouldn’t want to go there.” But King & Spalding’s presence percolates through the federal suit, which earlier this month saw the recusal of the judge assigned to the case, former King & Spalding partner William S. Duffey Jr. Atlanta attorney Eric C. Lang — who is representing Hitz and Shaw — said in court pleadings that he sought Duffey’s recusal because the case seeks damages from a King & Spalding client, SunTrust, and because of alleged conflicts of interest with another client, Coke. Lang also said he intends to explore the scope of the attorney-client privilege between King & Spalding and its clients SunTrust and Coke. In the companion case in Fulton Superior Court in which SunTrust is the plaintiff, Lang has sought discovery from Coke — which is not a party in the suit — seeking any documents or policies that would illuminate the soft-drink company’s relationship with the Atlanta bank. Coke has filed a response denying that any record of that relationship exists. In its answer, SunTrust has stated, “There is no conflict of interest” between the bank and Coke. Attorneys for both have claimed that such discovery, if it did exist, would be subject to attorney-client privilege. The attempt by Coke and SunTrust to use attorney-client privilege to protect information about the companies’ business relationship opens the door during discovery to “an inquiry into the attorney-client privilege between those two entities and the law firm that represented them,” Lang argued in one court pleading. In court filings, SunTrust attorneys have identified K&S partner John A. Wallace and retired partner George H. Lanier as witnesses in this case. Wallace is the uncle of the plaintiffs. His wife, Laura Wallace, is Sauls’ daughter and, like her nephews, a beneficiary. Wallace and Lanier both have been part of King & Spalding’s trusts practice. Both were involved in managing the Sauls trusts. In the Fulton suit, Wallace’s wife — who has said in court pleadings that she has no dispute with the bank’s management of the family trusts — is represented by retired King & Spalding partner Frank C. Jones. Jones is now of counsel at Jones, Cork & Miller in Macon. Lang has suggested there will be admissibility issues relating to the testimony of both John Wallace and Lanier. The court also may be asked to rule on the admissibility of Coke or SunTrust documents — many of them likely prepared by King & Spalding lawyers — that disclose the extent of the bank’s ties to Coke. If such ties have created an institutional conflict for the bank in its role as a trustee, but were approved by King & Spalding lawyers, the firm could face its own liability claims. Lang also has stated in court pleadings that he intends to seek discovery from King & Spalding. Lang said that because SunTrust has named Wallace and Lanier as witnesses, “we would anticipate their role as witnesses would involve discovery from them and their firm.” In a voicemail message, Wallace declined comment on his nephews’ allegations. “Since the matter’s in litigation, as you know, lawyers don’t talk about things,” he said. “It will just have to play out in the courts.”

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.