Alert March 29, 2012

Bank Securities Lending Settlement for $150 Million

The past few years have seen a number of class claims brought against banks in connection with securities lending programs (reported in the June 2009 ERISA Litigation Update).

One of these cases settled earlier this month, when a bank agreed to pay $150 million to resolve a certified class action alleging breach of ERISA fiduciary duties in connection with the bank’s securities lending program. The case is a consolidation of claims asserted on behalf of all plans and entities for which the bank invested cash collateral directly or indirectly in one or more debt securities issued by Sigma Finance, Inc. (“Sigma”), a structured investment vehicle.

Securities lending involves the loan of a security by its owner to a borrower who uses the security for short-term purposes. In this case, the plaintiffs alleged that the bank had a practice of lending securities held by the plans and using the cash collateral to invest in notes and other debt securities issued by Sigma, whose subsequent liquidation resulted in losses to participants in the bank’s securities lending program. The plaintiffs alleged that the bank breached its fiduciary duties by (i) investing cash collateral obtained from securities lending in the Sigma notes, which they alleged were “inappropriate and unsuitable for the investment of cash collateral,” (ii) maintaining investments in the notes in light of “the excessive risks” from Sigma’s inability to pay the notes as they matured and (iii) imprudently maintaining the investments in the Sigma notes despite warnings from analysts about their lack of liquidity. The plaintiffs further alleged that the bank had a conflict of interest because it separately earned fees from the cash collateral investments. (An earlier decision in the litigation had granted summary judgment to the bank on allegations of disloyalty stemming from its alleged separate transactions as a lender to Sigma.) 

According to the plaintiffs, the settlement of $150 million represents between 30% to 100 % of the losses that they would have been able to prove had the case gone to trial. The parties had been engaged in both formal and informal settlement discussions since December 2009. Their submission to the court explains that the parties had engaged in extensive direct and third-party discovery, including 40 fact and expert depositions and 21 expert reports, as well as briefing on cross motions for summary judgment and other motion practice.  

The settlement still requires court approval because it affects the interests of absent class members. If approved, it will release all claims against the bank and also contemplates releases of third-party claims brought by the bank against trustees of certain of the plans.

The case is Board of Trustees of the AFTRA Retirement Fund v. JPMorgan Chase Bank N.A. (S.D.N.Y. 09-cv-00686).