The Bank of New York Mellon's lawyers are awfully busy lately and a Detroit pension fund just added to their workload.
In a lawsuit filed yesterday in Manhattan the pension group says its custodian, BNY Mellon, gambled and lost more than $ 1 billion of its money in investments tied to failing Lehman Brothers. BNY continued to keep the pension funds' money invested in Lehman notes during 2007 and 2008 even as it became apparent that the investment bank was in trouble, the group says.
The class action complaint was filed by the General Retirement System of the City of Detroit which includes that city's police and fire retirement system. From the suit:
surprisingly took no action with respect to the Collateral investments it made on behalf of Plaintiffs and the Class. Although Defendant could have divested or otherwise hedged against losses on the Lehman Notes and other similar Lehman investments at any point during 2007 through 2008 and significantly minimized or eliminated any losses, Defendant held onto the Lehman investments. In such away, Defendant took a gamble with Plaintiffs' and the Class Plans' money for which it bore no risk of loss. Defendant made this gamble because under the Agreement, Defendant had no risk of loss but was paid 20% of any profit. Because of this "heads I win, tails you lose" paradigm, Defendant had no incentive to modify its unauthorized and risky investment strategy, and made no attempt to do so, because it was the beneficiary of all profits, and would not be responsible for any losses.
"We believe the suit is without merit and we will defend ourselves vigorously," BNY said in a statement today.
As Lehman's clearing bank, BNY knew about Lehman's problems and it required Lehman to put up additional collateral in order to keep those operations going, plaintiffs allege. "Additionally, in the summer and fall of 2008, executives within Defendant's Securities Lending Program attempted to minimize BNY Mellon's exposure in securities lending loans to Lehman, which Defendant would ultimately beheld liable for should Lehman collapse," the lawsuit says.
Despite it's own moves to protect itself, BNY did not act to protect the assets of the pension fund whose money was invested in Lehman notes, plaintiff says, and as a result breached its fiduciary duty.
According to the lawsuit, the fund was encouraged it to join BNY's securities lending program in which the bank would lend securities owned by the funds to creditworthy borrowers. Upon information from BNY, the fund believed program was “akin to a conservative money market account."
This isn't the only legal battle BNY is fighting. In June, BNY, acting as a trustee, struck a record $8.5 billion settlement with Bank of America over representation and warranty claims on mortgage securities issued by its Countrywide unit. That settlement is being objected to by several parties including AIG, the FDIC and some state attorneys general. BNY is also facing scrutiny over its pricing on some foreign exchange transactions for clients.
Earlier this month BNY announced the departure of Chairman and Chief Executive Robert Kelly who stepped down “due to differences in approach to managing the company” with the board of directors.
Its new chairman and CEO , Gerald Hassell, told investors at a Barclay's conference today that it would fight claims related to its foreign exchange transactions and defended its settlement with BofA.
"Our clients aren't as much upset with us as the attorneys general in some states are," Hassell said. "We don't think we've done anything out of line."
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