The suit, brought by the Public School Teachers’ Pension & Retirement Fund of Chicago and the City of Atlanta Firefighters’ Pension Plan, alleges Northern Trust breached its fiduciary and contractual duties by imprudently investing the cash and collateral received by the funds (Collateral Pools) in risky and long-term securities.
The complaint pointed out that the Collateral Pools, including Northern Trust’s Short Term Extendable Portfolio (STEP) and Core USA Collateral Section, sought to achieve conservative returns, and their primary focus was on preserving capital and maintaining liquidity. Further, because the cash invested in the Collateral Pools was collateral for loaned securities, which had to be returned to the borrowers of the securities upon the termination of the loan, all of the Collateral Pools were to be invested in highly conservative, short-term investments designed to maintain liquidity.
However, the complaint said that as of July 31, 2007, almost 70% of the securities held in STEP were not due to mature for over a year-and-half, and over 20% of the securities in STEP were not due for at least 10 years. In addition, the STEP portfolio included hundreds of millions of dollars in exotic, unregistered securities issued by “structured investment vehicles” – entities the complaint says were identified in hearings before the congressional Financial Crisis Inquiry Commission as one of the “causes of the financial crisis” that “served no good or productive purpose in the financial system.”
Also, the suit says, both STEP and Core USA held hundreds of millions of dollars of securities backed by mortgages and other consumer loans, and billions more in securities issued by banks with massive exposure to mortgages and consumer loans.
According to the Atlanta Journal-Constitution, in a written statement, Northern Trust spokesman Doug Holt said: “This lawsuit is misguided and Northern Trust will vigorously defend itself against this litigation.”
Northern Trust already faces numerous lawsuits by corporate pension plans related to its securities lending program (see Cover:Plowing New Fields).
The latest complaint is here.
A survey by Callan Associates found that since the financial crisis, many firms with securities lending programs are undergoing a controlled withdrawal to reduce the risk profile of the programs and minimize current and future losses (see Asset Mix:Collateral Damaged?).