Illinois court allows Teamsters case to continue
25 March 2015 Illinois
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The US District Court for the Northern District of Illinois has allowed a case to proceed that accuses BNY Mellon of violations of the Employee Retirement Income Security Act (ERISA) in connection with investments and decisions made by the bank in the administration of a securities lending programme.
The International Brotherhood of Teamsters Union pension plan accused BNY Mellon in March 2013 of losing $25 million of cash collateral received from securities lending following the collapse of Lehman Brothers in 2008.
BNY Mellon failed to invest collateral in safe and prudent investments and monitor them appropriately, and did not act as a prudent securities lending fiduciary despite first-hand knowledge of Lehman Brothers's financial distress, all adding up to a breach of ERISA's duty of prudence, according to the Teamsters pension plan.
The bank moved to have the case dropped, arguing that the pension plan’s ‘red flag’ allegations are insufficient to state a claim for violation of ERISA.
Ruling against BNY Mellon’s motion to have the case dismissed on 16 March, Judge John Blakey said: “The court does not read the plaintiffs' complaint as alleging that the defendants [BNY Mellon] lacked prescience or that they should have recognised from the information available in the market that the Lehman bonds were over-valued.”
“Rather, the plaintiffs allege that, under the circumstances as they existed in the market at the time, no reasonably prudent securities lending fiduciary would have concluded that Lehman debt was a sufficiently safe investment for a securities lending client and no reasonably prudent securities lending fiduciary would have maintained the collateral investments in the Lehman notes through Lehman's bankruptcy filing.”
“Thus the claim is not that the defendants were imprudent in failing to recognise that Lehman would file for bankruptcy and not pay out on the notes, but that it was imprudent to hold the Lehman debt, given the circumstances existing in the market and given the plaintiffs' investment profile.”
A BNY Mellon spokesperson said: “We believe the lawsuit to be without merit and we intend to continue to defend ourselves vigorously.”
The International Brotherhood of Teamsters Union pension plan accused BNY Mellon in March 2013 of losing $25 million of cash collateral received from securities lending following the collapse of Lehman Brothers in 2008.
BNY Mellon failed to invest collateral in safe and prudent investments and monitor them appropriately, and did not act as a prudent securities lending fiduciary despite first-hand knowledge of Lehman Brothers's financial distress, all adding up to a breach of ERISA's duty of prudence, according to the Teamsters pension plan.
The bank moved to have the case dropped, arguing that the pension plan’s ‘red flag’ allegations are insufficient to state a claim for violation of ERISA.
Ruling against BNY Mellon’s motion to have the case dismissed on 16 March, Judge John Blakey said: “The court does not read the plaintiffs' complaint as alleging that the defendants [BNY Mellon] lacked prescience or that they should have recognised from the information available in the market that the Lehman bonds were over-valued.”
“Rather, the plaintiffs allege that, under the circumstances as they existed in the market at the time, no reasonably prudent securities lending fiduciary would have concluded that Lehman debt was a sufficiently safe investment for a securities lending client and no reasonably prudent securities lending fiduciary would have maintained the collateral investments in the Lehman notes through Lehman's bankruptcy filing.”
“Thus the claim is not that the defendants were imprudent in failing to recognise that Lehman would file for bankruptcy and not pay out on the notes, but that it was imprudent to hold the Lehman debt, given the circumstances existing in the market and given the plaintiffs' investment profile.”
A BNY Mellon spokesperson said: “We believe the lawsuit to be without merit and we intend to continue to defend ourselves vigorously.”
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