The suit charged that in 2007, Union Bank used its cash collateral from the securities lending program to buy several corporate obligation bonds on the fund’s behalf, including a three-year Lehman Brother corporate obligation bond. That violated the fund’s guidelines mandating the securities lending cash collateral be invested conservatively and prudently, the fund alleged. Investing in the high-risk instruments caused the fund to suffer losses, the complaint said.
The fund trustees claimed in their lawsuit that Union Bank used $5 million of the fund’s assets to invest in the Lehman Brothers bond, in violation of investment guidelines that prohibited Union Bank from investing more than 5% of the fund’s assets in a single investment.
Further, the lawsuit claimed that in violation of the investment guidelines, Union Bank held on to the Lehman Brothers bond when it was “widely known” that Lehman Brothers was a risky investment. “Union Bank made these perilous and improper investments, and then continued to hold them, despite myriad news accounts chronicling the risky nature of asset-backed securities beginning the year before the investments were made,” the complaint said.
The lawsuit also charged that Union Bank breached its duties by investing fund assets in student loan asset-backed securities, and that the bank’s actions constituted an Employee Retirement Income Security Act (ERISA) violation, the suit claimed.
“Under these circumstances, when the overarching goal was to preserve principal and maintain adequate liquidity to secure the return of collateral to borrowers—an expected and inevitable requirement in any securities lending program—a reasonably prudent fiduciary would not have made the hazardous investment decisions made by Union Bank,” the complaint said.
The complaint is here.