According to lawsuit filed in the U.S. District Court for the Western District of Tennessee, the investments were in conflict with the plan’s investment guidelines and with the trust agreement between NTC and FedEx, which provided that NTC could lend assets of the plan only if it entered into a written agreement with FedEx allowing such securities lending consistent with Department of Labor Prohibited Transaction Exemption 81-6.
The complaint says that in May 2003, NTC recommended that the plan invest in its Bond Index Fund, telling the plan’s fiduciaries that the fund met the plan’s need for a safe index fund and tracked the Lehman Brothers Long Term Government Bond Index.
One year after FedEx began investing in the Bond Index Fund, NTC approached the plan’s fiduciaries with a proposal that it allow NTC to lend assets of the plan, and the fiduciaries “advised NTC that FedEx was not interested in securities lending because any benefits provided by securities lending were not worth the risks associated with even traditional securities lending programs,” the suit says.
In addition, in 2006, the plan’s fiduciaries authorized NTC to begin investing plan assets in NTC’s Russell Index Fund, represented by NTC as having the objective to approximate the overall performance of the Russell 2000 index. NTC said it would eliminate from the fund any stock it deemed to have an inordinately high degree of credit risk.
FedEx insists that at no point did the plan’s fiduciaries execute a securities lending agreement authorizing NTC to loan out plan assets.
However, in September 2008, when the FedEx plan’s fiduciaries decided to change the plan’s overall investment strategy moving away from the Bond Index Fund, they learned that over 80% of the plan’s assets in the Bond Index Fund had been loaned out to borrowers and that the cash collateral held in return for the securities was invested in a pool of securities known as the Core USA Fund, managed by NTI
“Despite NTC’s knowledge of FedEx’s investment objectives and its aversion to securities lending, it did not advise FedEx that 80% of the Bond Index Fund and 50% of the Russell Index Fund would be involved in securities lending or that any collateral obtained for the loaned securities would be invested in securities with a higher aggregate risk than the loaned securities,” the complaint said.
The lawsuit by FedEx Corp. against Northern Trust further alleges that in early October 2008, NTI reached an agreement under which it would make eight installment payments to the FedEx plan to allow the plan to withdraw from both index funds, but NTI reneged on this agreement and gave FedEx other withdrawal options that it deemed unacceptable.
"NTC's current withdrawal option essentially requires that FedEx use the proceeds from the highly marketable and liquid US Treasury securities that it originally purchased to pay back the borrowers, leaving FedEx with the Core USA fund securities, many of which are impaired and/or cannot be liquidated at the present time, if ever," the complaint said.
The FedEx suit is the second securities lending suit against Northern Trust. In October, representatives of BP's defined contribution and defined benefit plans accused NTI and NTC of carrying out imprudent securities lending activities that resulted in substantial losses and not disclosing those losses (See Northern Trust Hit with Securities Lending Lawsuit).