North Carolina State Treasurer Janet Cowell on Thursday filed a lawsuit against Bank of New York Mellon, claiming it made an unauthorized $95 million investment in Lehman Brothers Holdings notes in December 2006, according to a court filing.
The suit, filed in North Carolina's General Court of Justice, Superior Court Division, in Raleigh, claims it was a breach of the bank's contract with the state governing securities lending investments. The investment decreased in value by about $70 million following Lehman's Chapter 11 bankruptcy filing in September 2008.
Ms. Cowell's office oversees the $71.8 billion North Carolina Retirement Systems, Raleigh.
“We believe the suit is without merit, and we will defend ourselves vigorously,” said Kevin Heine, BNY Mellon spokesman.
The suit claims the bank became very concerned about Lehman's financial stability in 2007, continuing into 2008. “Defendant took steps to minimize its own exposure to Lehman, but did not take any steps to protect the state, to whom it owed a fiduciary duty,” the lawsuit states.
BNY Mellon has been the state's securities lending agent since 1982. The primary purpose of the securities lending program is “not to obtain portfolio gains, but instead to earn a modest return to offset the custodial fees” the bank charges as custodian of the retirement systems' assets, according to the lawsuit.
Information about the investment, including the actual purchase and maturity dates, was not released to the state until November 2010.