Chicago Public School Teachers’ Pension and Retirement Fund and the City of Atlanta Firefighters’ Pension Plan filed a joint federal lawsuit against Northern Trust, claiming it breached fiduciary duty in managing their assets in securities lending programs.
The suit was filed Jan. 29 in U.S. District Court in Chicago. Judge Rebecca Pallmeyer is presiding over the case, which seeks class-action status.
The suit accuses Northern Trust Investments NA and parent Northern Trust Co. of “breaches of contract and fiduciary duty” in managing assets for the funds related to securities lending.
Instead of investing securities lending collateral pools for the $9.2 billion Chicago plan and the $363 million Atlanta fund “in conservative, highly liquid, ultra-short-term investment funds” Northern Trust, “in flagrant violation of its duties, instead locked those funds into risky, long-term investments — including hundreds of millions of dollars of unregistered, illiquid securities that plummeted in value,” the 43-page complaint said.
The Chicago and Atlanta funds participate directly in the securities lending program and cash collateral pools. The Chicago fund also participates indirectly through its investment in an S&P 400 midcap index fund, managed by Northern Trust. The amount the Chicago and Atlanta funds lent in the securities lending, invested in the pool and invested in the S&P 400 were unavailable. Avi Josefson, senior counsel, Bernstein Litowitz Berger & Grossmann, which is representing the funds in the suit, said Northern Trust imposed withdrawal limitations in September 2008. The pool has had further losses since then, he said. The funds remain clients of Northern Trust because the limitations effectively keep the funds from withdrawing, he said.
The suit seeks unspecified award of damages and lifting of withdrawal limitations. In addition, it seeks an order that plaintiffs in the class are not liable for realized and unrealized losses incurred in the collateral pools “as a result the Defendants’ breaches of their fiduciary and/or contractual duties,” the suit said.
“While the loss sustained by Northern Trust is small compared to the $9.2 billion value of our portfolio, CTPF trustees, with the assistance of legal counsel, determined that litigation was in the best interest of our pensioners and members,” the statement said.
Kevin R. Huber, executive director of the fund, referred a call to Mr. Josefson.
Atlanta fund representatives couldn’t be reached.
Northern Trust said in a statement responding to the lawsuit, said “We believe the litigation is seeking to assign blame for extraordinary, global economic events of 2007 to early 2009.”
The teachers fund “made the decision to enter a securities lending program, and has participated in securities lending for nearly two decades,” according to the Northern Trust statement. “In 1995, the fund selected a custom investment option which gave it complete discretion over investment guidelines and level of potential risk and reward. Northern Trust complied with the fund’s investment guidelines in reinvesting cash collateral for its securities lending program.
“For many years, the reinvestment option was a multimillion-dollar revenue generator for the fund. In fact, in 2009 the fund earned $59 million on its collateral reinvestments related to securities lending. … Northern Trust has a long-term relationship with Chicago Teachers and we feel this lawsuit is misguided. Northern Trust will vigorously defend itself against this litigation.”