Northern Trust mismanaged lending, investors claim
Northern Trust Corp., the Chicago- based custody bank, was accused of mismanaging funds in its securities-lending programs in a complaint by the committee overseeing pension plans for BP Plc's North American unit.
The pension plan committee claimed in the lawsuit that Northern Trust improperly managed funds for investors that lent securities out to third parties, causing losses. The bank this month settled a suit by the University of Washington over similar allegations.
Northern Trust's securities lending program ``involved inappropriate risk and led to inappropriate losses'' BP said in its complaint, filed Oct. 21 in federal court in Chicago.
Wells Fargo & Co., the bank that is acquiring Wachovia Corp., was also sued over its securities-lending program, the Wall Street Journal reported yesterday. A group of nonprofit organizations in Minnesota claimed in a state-court suit that Wells Fargo lost at least $17 million on those investments, the newspaper said.
``We dispute these allegations,'' Gabriel Boehmer, a Wells Fargo spokesman, said in a statement. ``Like all investments, the investors bear the risk of their losses. We intend to vigorously defend these actions.''
Fund managers with long-term investments in stocks or bonds, such as pension funds and many mutual funds, often lend out a portion of their holdings in order to boost returns. The credit crisis led to mounting losses in the securities-lending market and investors are now turning against the banks managing the programs.
`Unfair'
In the suit against Northern Trust, BP seeks to withdraw its money from the program without being charged for losses it claims the bank incurred through bad investments. It also seeks unspecified damages.
``BP was invested in a number of commingled funds'' like many other clients, John O'Connell, a spokesman for Northern Trust, said in a statement. ``In their lawsuit, BP seeks to avoid safeguards that Northern Trust put in place to ensure that all the participants in those funds are treated equitably during extraordinarily difficult economic conditions.''
BP's effort to withdraw all of its investment would be unfair to other clients, O'Connell said.
Companies in securities lending make money by investing the cash that securities borrowers, usually hedge funds and broker- dealers, hand over as collateral.
Custody banks act as intermediaries, taking a fee from the borrowers and managing the collateral funds, which are usually operated like money-market funds, investing in short-term, liquid securities.
Taking Losses
Any losses from the funds are borne by the securities lender, unless the custodian chooses to bail them out, as Bank of New York Mellon Corp. and Northern Trust have done in some cases recently. Lenders generally agree to participate for set periods and aren't allowed to pull out before a contract expires.
This month, Northern Trust settled the University of Washington's claims involving $1.4 billion of its endowed funds. Under the settlement, the University agreed to take a $6.6 million loss to pull its funds out of the program.
O'Connell declined to comment on that settlement.
The Minnesota suit was filed in state court last week by the Robins, Kaplan, Miller & Ciresi Foundation for Children, two other foundations and a nonprofit insurance association, according to the Wall Street Journal.
In September, BNY Mellon agreed to offset some losses suffered by securities-lending clients in investments in debt issued by bankrupt Lehman Brothers Holdings Inc.
Northern Trust also last month said it spent $167.6 million before taxes to support funds within the firm's securities lending business that bought Lehman debt.
The cases are BP Corp. North America Inc. Savings Plan Investment Oversight Committee v. Northern Trust Investments N.A., 08-CV-6029, U.S. District Court, Northern District of Illinois (Chicago); University of Washington v. Northern Trust Co., 08-CV-1458, U.S. District Court, Western District of Washington (Seattle).