Bank of New York Mellon Corp (BK:US). must face two International Brotherhood of Teamsters benefit funds’ claims the lender failed to protect them from the 2008 collapse of Lehman Brothers Holdings Inc., a U.S. judge ruled.
BNY-Mellon breached its duty of prudence when it didn’t liquidate securities-lending program collateral the unions let the bank invest with Lehman in 2006, amid mounting evidence the firm was in financial peril, the funds said in a complaint filed in federal court in Chicago last year.
BNY-Mellon bought almost $25 million in Lehman-issued notes for the funds, according to a ruling by U.S. District Judge Sara Ellis posted to the court’s electronic docket today. Lehman filed the biggest bankruptcy in history in September 2008, listing $613 billion in debt.
“The funds have detailed numerous warning signs that they allege should have caused defendants to reconsider whether it was prudent to retain the Lehman notes,” Ellis said, denying the bank’s bid for dismissal of the suit.
Securities lending involves the temporary loan of an institutional investors’ holdings to a third party in exchange for cash collateral which is then invested in short-term liquid instruments until the borrowed shares are returned.
Kevin Heine, a spokesman for the New York-based lender, said in a phone interview that the court’s ruling addressed only the legal sufficiency of the allegations, not its merits.
BNY-Mellon solicited the teamster funds’ participation in their program by touting its conservative strategy and low risk, according to the court’s ruling.
By the time Lehman declared bankruptcy, BNY-Mellon had removed the firm from its list of approved securities borrowers and had taken steps to reduce its own exposure without doing the same for the pension funds, according to the complaint.
BNY-Mellon logged a $24.5 million deficiency in the pension funds’ collateral accounts. That sum was reduced through distributions from Lehman’s bankruptcy estate. Still, the funds maintain, they sustained “significant” losses.
The case is International Brotherhood of Teamsters Union Local 710 Pension Fund v. Bank of New York Mellon Corp., 13-cv-1844, U.S. District Court, Northern District of Illinois (Chicago).
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