Adler Pollock & Sheehan, lawyers for the Middlesex Retirement System, said on Friday that legal action was being taken against Boston Safe Deposit and Trust Company, Mellon Financial Corporation, and Russell/Mellon Analytical Services, Inc., for, among other things, “breach of contract and negligent misrepresentation due to Mellon’s failure to perform under its contractual custody arrangements with Middlesex.”
According to a press release, Middlesex claims that Mellon failed to accurately verify pricing data from a Bay State firm that had been investing pension money in foreign currency options. The now-closed Cambridge Financial Management Inc. (CFM) had been providing statements to Middlesex through Mellon valuing its investments at $1.6 million, the board said. However, after the death of fund manager James T. Kneafsey, founder and principal of CFM, the Middlesex system said it “learned for the first time that CFM was the only account where Mellon took market values for traded securities from a fund manager.”
The pension system says that, “unbeknownst to Middlesex, Mellon never had those valuations independent verified,” and that instead of a holding value of $1.6 million for the portfolio, as evidenced on monthly custody statements from Mellon, the portfolio actually reflected a $36-38 million loss.
A spokesman for Pittsburgh, Pennsylvania-based Mellon said, “Under its agreement with Middlesex, Mellon’s role was to take the values reported by Cambridge Financial Management and report them to Middlesex. Mellon categorically denies responsibility for any of Middlesex’s alleged losses,” according to a Reuters report. “Boston Safe’s custody agreement with Middlesex provides that Boston Safe will not be liable for any act or omission of another party such as Cambridge,” Mellon said, according to a Boston Herald report. “While Mellon regrets that Middlesex sustained losses, Mellon fully met its obligations under the agreement.”
However, the pension fund board said that as custodian, Mellon should have provided accurate verifications for all 60 portfolios in the Middlesex pension fund’s system. In fact, Adler Pollock & Sheehan cite language from a September 2001 written response to a request for proposal from Mellon that references daily position reconciliations, a “rigorous system of computerized checks and controls,” and a “final audit” designed to “ensure that the information you receive is 100% accurate.”
The Middlesex Retirement System, the third largest system in Massachusetts, says it is planning to replace Mellon with a new custodian bank, and has begun a search for a replacement. The pension fund also says that retiree benefits will not be affected by the loss.
The Public Employee Retirement Administration Commission (PERAC), which oversees all of the pension funds in Massachusetts, has launched an investigation into what happed with the Middlesex fund. The Middlesex Retirement System has over 16,000 public employees, with 5,000 currently receiving benefits.