United States District Court, N.D. Illinois, Eastern Division
THE INTERNATIONAL BROTHERHOOD OF TEAMSTERS UNION LOCAL NO. 710 PENSION FUND, and JAMES E. DAWES and NEAL J. LONDON, Trustees, and THE INTERNATIONAL BROTHERHOOD OF TEAMSTERS UNION LOCAL NO. 710 HEALTH & WELFARE FUND, and JAMES E. DAWES and NEAL J. LONDON, Trustees, Plaintiffs,
THE BANK OF NEW YORK MELLON CORPORATION, a Delaware Corporation, and THE BANK OF NEW YORK MELLON (f/k/a THE BANK OF NEW YORK), Defendants.
OPINION AND ORDER
SARA L. ELLIS, District Judge.
Plaintiffs the International Brotherhood of Teamsters Union Local No. 710 Pension Fund (the "Local 710 Pension Fund"), the International Brotherhood of Teamsters Union Local No. 710 Health & Welfare Fund (the "Local 710 Health & Welfare Fund, " and, collectively with the Local 710 Pension Fund, the "Funds"), and James E. Dawes and Neal J. London, trustees of the Funds, filed a first amended complaint under the Employee Retirement Income Security Act ("ERISA"), codified at 29 U.S.C. § 1001 et seq., against defendants the Bank of New York Mellon Corporation ("BNY Mellon Corp.") and the Bank of New York Mellon ("BNY"). The Funds bring claims for breach of the duties of prudence and loyalty in violation of ERISA § 404, 29 U.S.C. § 1104, and for violation of ERISA § 406, 29 U.S.C. § 1106. Before the Court is Defendants' motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). For the following reasons, Defendants' motion  is denied.
In 2006, Defendants, global leaders in securities lending, solicited the Funds, which maintain a conservative investment profile focused on the preservation of principal, to participate in Defendants' securities lending program. Briefly, securities lending involves the provision of temporary loans of security from an institutional investor's portfolio to another entity in exchange for collateral, usually in the form of cash. The collateral is then invested in short-term, liquid instruments until the security is returned. This arrangement generates incremental revenue on securities being held in custodial accounts for the institutional investor and is not intended to provide the types of significant investment returns typically associated with speculative investment strategies.
To convince the Funds to participate, Defendants touted the program's flexibility, conservative investment strategy, and low risk. They emphasized that no client had experienced any losses in the program's twenty-eight-year history and that Defendants were "a uniquely positioned major Wall Street clearance bank with credit expertise in the Securities Industry that is second to none." First Am. Compl. ¶ 31. Based on Defendants' representations, the Funds agreed to participate in the program and executed Securities Lending Agreements and Guaranties (the "Agreements") with BNY on or about June 6, 2006. Pursuant to these Agreements, BNY was appointed the Funds' agent with full discretion to lend securities to a list of approved borrowers and invest the collateral in an agreed list of approved investments. BNY Mellon Corp., through its BNY Mellon Asset Servicing division, managed the Funds' cash investments.
Pursuant to the Agreements, in August and December 2006, Defendants purchased nearly $25 million of corporate floating rate notes issued by Lehman Brothers Holding Company, Inc. ("Lehman") on the Funds' behalf. These notes bore the CUSIP numbers 52517PL33 and 52517PQ53 (the "Lehman Notes"). Despite increasing uncertainty about Lehman's financial stability, as detailed below, Defendants did nothing to protect the Funds' investments, with the end result being that, when Lehman filed for bankruptcy on September 15, 2008, Defendants booked a $24.5 million deficiency to the Funds' collateral accounts. Although that deficiency was subsequently reduced by distributions from the Lehman bankruptcy estate and the sale of the Lehman Notes, the loss remained significant.
More specifically, between February and April 2007, the subprime mortgage industry collapsed, with various subprime mortgage lenders filing for bankruptcy. This caused S&P and Moody's to downgrade bonds and securities that were backed by subprime mortgages. The crisis continued, with then U.S. Treasury Secretary Hank Paulson warning against relying on rating agency ratings in view of the failures related to mortgage-backed securities in October 2007. In March 2008, Bear Stearns, then the nation's fifth largest investment bank, was bought by JP Morgan Chase at a fraction of its value, and in mid-July 2008, IndyMac Bank was placed into FDIC receivership. At that time, Bloomberg reported over $435 billion of write-downs and credit losses related to mortgage-backed securities, collateralized debt obligations, leveraged loans, and other fixed-income assets since January 2007.
Amidst this crisis, unbeknownst to the Funds but not to Defendants, Lehman's core businesses were severely impacted and intense speculation arose regarding Lehman's future. On December 14, 2007, Punk Ziegel & Co. issued an analyst report recommending that Lehman's stock be avoided, as the outlook for its business was "not positive." Id. ¶ 62. On March 17, 2008, a column was published in the Dow Jones Newswires entitled "IN THE MONEY: Why Lehman May or May Not Be The Next Bear, " which stated that "Lehman has sizable exposure to dicey mortgage securities and other hard-to-value instruments that could be a drag on its liquidity" and that Lehman held "$42 billion worth of Level 3' securities - illiquid, write-down-prone securities valued using Lehman's estimates and models instead of actual market data." Id. ¶ 64 (emphasis omitted).
Industry players also sounded warning bells about Lehman, with Moody's lowering its outlook on Lehman's rating, UBS downgrading Lehman stock from buy to neutral, and analysts noting that Lehman was undercapitalized. In June 2008, S&P downgraded its rating of the Lehman Notes from A to A, Fitch downgraded its rating from A to A-, and Moody's changed its rating outlook on Lehman from stable to negative. That same month, Lehman announced a second-quarter loss of $2.8 billion-higher than analysts expected-and its CFO and COO both resigned shortly thereafter. By July 2008, Lehman's stock price had dropped to less than $17 per share-a drop of more than 70% since January 2008. At the same time, however, because the Lehman Notes were still trading at close to par in July 2008, Defendants could have liquidated the Funds' holdings in Lehman at little if any loss, but they did not.
Other signs also signaled that holding onto the Lehman Notes was imprudent. In 2007, the cost of Lehman credit default swaps for one-year notes rose from $6 to $144 and reached approximately $700 in the first eight months of 2008. By late August 2008, it was reported that Lehman owned approximately $61 billion in mortgages and asset-backed securities and that its market capitalization had decreased to approximately $11 billion. On September 9, 2008, Lehman's stock fell to $7.79 and S&P issued a negative watch on Lehman after a state-run South Korean firm put acquisition talks with Lehman on hold. The situation continued to deteriorate on a daily basis, even though the Lehman Notes continued to trade close to par value. Ultimately, Lehman filed for bankruptcy on September 15, 2008. Thereafter, Moody's downgraded Lehman's long term debt rating to B3 from A2, S&P from A to CCC-, and Fitch to default. The price of Lehman bonds fell further and, by September 18, 2008, they were trading at only 15% of par value.
Moreover, months before Lehman's bankruptcy filing, Defendants had removed Lehman from their approved borrowers list. In a September 15, 2008, press release, Defendants made clear that they had eliminated their own exposure to Lehman by the time of the bankruptcy filing. An after-the-fact independent investigation conducted by an examiner appointed by the bankruptcy court also revealed that, because of its position as one of Lehman's clearing banks, BNY knew of Lehman's deteriorating financial condition before Lehman filed for bankruptcy and took steps to protect its own interests. For example, by summer 2008, BNY was demanding collateral deposits from Lehman to secure intraday credit risk. Additionally, on August 20, 2008, BNY entered discussions with Lehman to minimize its exposure to Lehman's European commercial paper and medium term note programs, with BNY eventually allowing Lehman to open a money market account with BNY so as to maintain sufficient deposits to cover BNY's forecasted intraday exposure to Lehman. Thus, on September 11, 2008, BNY received an initial deposit of $125 million from Lehman and held $170 million in collateral the day Lehman filed for bankruptcy. Despite Defendants' "specific knowledge and recognition of the growing risks to Lehman's viability - and, necessarily, the risks to investments in Lehman such as the Lehman Notes - and despite the multiple industry and media reports speculating about Lehman's future in 2007 and 2008, Defendants failed to do anything with respect to the Funds' investment in the Lehman Notes to eliminate or minimize the losses that ultimately materialized when Lehman declared bankruptcy." Id. ¶ 10.
A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint, not its merits. Fed.R.Civ.P. 12(b)(6); Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In ruling on a Rule 12(b)(6) motion to dismiss, the Court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences from those facts in the plaintiff's favor. AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011). To survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of a claim's basis but must also be facially plausible. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim ...