Northern Trust Hit with Securities Lending Lawsuit

The fiduciaries of BP Corp. North America Inc.'s retirement plans have accused Northern Trust Co. of breaching their fiduciary duties by not disclosing substantial securities lending losses.

The representatives of BP’s defined contribution and defined benefit plans filed the federal court suit in Chicago charging Northern Trust Investments (NTI) and Northern Trust Co. (NTC) with carrying out imprudent securities lending activities that resulted in the losses. Those activities represented a breach under the Employee Retirement Income Security Act (ERISA), the suit claimed.

The suit charged that NTI was authorized to lend securities from four collective investment funds in which the plans’ assets were placed. The funds were benchmarked to different stock or bond indexes.

The suit said NTI appointed NTC as the securities lending agent for the collective funds and delegated to NTC the discretion to manage the securities lending activities.

NTI shared a monthly fee equal to a percentage of the net income earned by NTC through the securities lending, but NTI did not share in any realized losses on the collateral investment, according to the suit.

The plaintiffs charged that the whole loss was allocated to the collective funds and investors, the complaint alleged.

Generating Returns

NTI told the fiduciaries that the purpose of the securities lending program was to generate a return through investment of the cash collateral received from borrowers of securities. The program would allow NTI to offset its expenses under the investment agreements with the plans, and further allowed the collective funds to better match the performance of their respective benchmark indices, the suit quoted NTI as saying.

The lawsuit alleged that NTI and NTC imprudently operated the securities lending program because a high percentage of the securities in the collective funds were loaned and the cash collateral for the loans was invested in collateral funds that were riskier than the collective funds’ aggregate risk.

The fiduciaries of BP’s defined contribution plans stopped additional BP participant contributions to, and transfers into, the collective funds in mid-October, according to the suit, and demanded that NTI and NTC distribute cash to the plans reflecting the value of the plans’ investment accounts without the securities lending-related losses.

NTI has refused to distribute the plans’ assets in cash and has informed the plan fiduciaries that NTI’s distribution would include interests in impaired securities.

The complaint in BP Corp. North America Inc. Savings Plan Investment Oversight Committee v. Northern Trust Investments N.A., N.D. Ill., No. 1:08-cv-06029 is available here.

Northern Trust Corporation announced in September it would “take certain actions” to support securities lending clients whose cash collateral is invested in five constant dollar, commingled investment pools hurt by recent market turmoil (see Northern Trust to Aid Securities Lending Clients).

Northern Trust said it expected to incur a pre-tax charge of approximately $150 million ($94 million after-tax or $0.42 per share) in the third quarter in connection with the securities lending action. The exact nature of the securities lending program was not detailed.