Northern Trust SecLending Suit Plaintiffs Survive First Challenge

September 10, 2010 (PLANSPONSOR.com) – Participants of two 401(k) plans have gotten the go-ahead from a federal judge to press on with their lawsuit that claims Northern Trust breached its fiduciary duty by mishandling its securities lending program.

U.S. District Judge William J. Hibbler of the U.S. District Court for the Northern District of Illinois ruled that plaintiffs Joseph Diebold and Paul Hundt had put forward enough evidence that Northern Trust Investments (NTI) and Northern Trust Co. (NTC) had ignored warning signs indicating a different investment strategy was in order. Diebold participated in an ExxonMobil plan, while Hundt was in a Texas Instruments plan. NTI served as the investment manager for both savings programs.

In allowing the case to move forward, Hibbler cautioned Diebold and Hundt, though, that they couldn’t simply allege that the asset-backed securities market was under stress because of the economic downturn. Rather, Hibbler contended, the plaintiffs would likely need to demonstrate that reasonably prudent fiduciaries would have actually changed their investment strategy.

Diebold and Hundt charged in their 2009 suit that their plans’ investment guidelines required NTI to manage three pools – formed to manage securities lending collateral – with the goal of preserving capital and providing liquidity. The plaintiffs alleged that NTI and NTC imprudently managed the collateral pools, which caused the investment funds to lose money.

In particular, Diebold and Hundt alleged that NTI and NTC should have recognized that the collateral pools presented the risk of tremendous loss in the face of the financial crisis triggered by concerns over residential lending, particularly in the subprime market.

The case is Diebold v. Northern Trust Investments N.A., N.D. Ill., No. 09 C 1934.

Northern Trust’s securities lending program has been the subjejct of a good deal of recent litigation (see Northern Trust Hit with another Suit over Securities Lending Program). Other securities lending service providers have likewise been hit with similar suits (see Plowing New Fields).  

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