Court Weighs Dudenhoeffer in $25M Case Targeting Investment in Lehman Bros. Notes

Bank of New York Mellon Corp. received another blow to its securities lending program on March 16, when a federal judge gave the green light to claims challenging the bank's involvement with now-defunct Lehman Brothers Holding Co. (Teamsters Local 710 Pension Fund v. The Bank of N.Y. Mellon Corp., 2015 BL 70319, N.D. Ill., No. 1:13-cv-01844, 3/16/15).

In allowing a Teamsters pension plan to proceed with a lawsuit accusing the bank of losing nearly $25 million in pension assets, Judge John R. Blakey of the U.S. District Court for the Northern District of Illinois considered a recent U.S. Supreme Court decision affecting plan fiduciaries who invest in employer stock (Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459, 58 EBC 1405 (U.S 2014)).

Although the instant dispute didn't involve the type of employer stock plan at issue in Dudenhoeffer, BNY Mellon argued that this decision foreclosed the Teamsters plan from arguing that the bank should have realized from publicly available information that Lehman's debt was overvalued.

Blakey disagreed with this reading of Dudenhoeffer, explaining that the Teamsters plan argued only that it was imprudent for BNY Mellon to hold Lehman debt given the “circumstances existing in the market” and the Teamsters plan's “investment profile.” This claim remained viable following Dudenhoeffer, Blakey concluded.

This case isn't the only pending lawsuit challenging the BNY Mellon securities lending program and its investment in notes issued by Lehman. Last fall, another judge in the Northern District of Illinois allowed similar claims by a different union pension fund to move forward against the bank (Food and Commercial Workers-Indus. Pension Fund v. BNY Mellon, 2014 BL 256860 (N.D. Ill. 2014)).

Securities Lending

In 2006, the Teamsters plan authorized BNY Mellon to lend securities from the plan's accounts in return for collateral that would then be invested in certain approved investments. The goal was to provide the plan incremental returns without exposure to the substantial risk often present in speculative investments.

As part of this securities lending program, BNY Mellon purchased almost $25 million in Lehman-backed floating rate notes.

As Lehman's financial condition deteriorated and ultimately collapsed, the Teamsters plan suffered a $24.5 million deficiency from the note held by BNY Mellon.

The plan filed suit against two BNY entities, accusing them of fiduciary imprudence and disloyalty under the Employee Retirement Income Security Act.

Last year, the court denied BNY Mellon's motion to dismiss the suit, finding that the plan stated valid claims for fiduciary breach and self-dealing

BNY Mellon then tried a different tactic, filing a motion for judgment on the pleadings.

Text of the opinion is at

Excerpted from a story that ran in Pension & Benefits Daily (03/17/2015).

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