Northern Trust Faces Securities Lending Lawsuit

(February 3, 2010) — Northern Trust Co. has been sued by the $9.2 billion Chicago Public School Teachers’ Pension & Retirement Fund (CTPF) and the $363 million City of Atlanta Firefighters’ Pension Plan.

The suit, filed January 29 in U.S. District Court in Chicago, accuses Northern Trust of “breaches of contract and fiduciary duty” in managing assets for the funds related to securities lending. The funds claim their assets were improperly placed in risky securities that plunged in value. But, according to Northern Trust, the suit aims to assign blame for the global economic events of 2007 to early 2009.

The suit also names Northern Trust Investments N.A. and seeks class-action status.

The 43-page complaint said that instead of investing securities-lending collateral pools for the Chicago and Atlanta funds “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.”

Without specifying the amount of the loss, Chicago fund representatives stated in a media release that “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.”

Since the credit crisis, several other custodians have dealt with lawsuits over their securities lending programs. Northern Trust was sued over its cash collateral reinvestment program in September 2008 by the University of Washington. Since then, several other pension funds have sued financial institutions over lack of disclosure and harming shareholders.