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United Food and Commercial Workers International Union-Industry Pension Fund v. Bank of New York Mellon

United States District Court, N.D. Illinois, Eastern Division

September 16, 2014

UNITED FOOD AND COMMERCIAL WORKERS INTERNATIONAL UNION-INDUSTRY PENSION FUND, MARC PERRONE (TRUSTEE), and WALTER B. BLAKE (TRUSTEE), Plaintiffs,
v.
THE BANK OF NEW YORK MELLON, Defendant.

MEMORANDUM OPINION AND ORDER

MANISH S. SHAH, District Judge.

This is a suit brought against the Bank of New York Mellon under the Employee Retirement Income Security Act. Plaintiffs are the United Food and Commercial Workers International Union-Industry Pension Fund and two of its trustees (collectively, "the Fund"). Under its "securities lending program, " BNY Mellon loaned securities that were owned by the Fund to third-party borrowers. The borrowers posted collateral for the loans, which BNY Mellon invested. The borrowers were guaranteed a rate of return; additional investment gains were split between the Fund and BNY Mellon. If the investments earned insufficient gains, the Fund had to replenish the pool of collateral, so that collateral could be returned to the borrowers when they returned the Fund's securities.

The Fund alleges that BNY Mellon breached fiduciary obligations imposed by ERISA, by acting in its own self-interest and by investing the collateral imprudently. BNY Mellon moves to dismiss the amended complaint. For the reasons discussed below, that motion is denied.

I. Legal Standards

BNY Mellon's motion is brought under Rule 12(b)(6) of the Federal Rules of Civil Procedure. I therefore construe the complaint in the light most favorable to the Fund, accept as true all well-pleaded facts, and draw reasonable inferences in the Fund's favor. Yeftich v. Navistar, Inc., 722 F.3d 911, 915 (7th Cir. 2013). Statements of law, however, need not be accepted as true. Id. Rule 12(b)(6) limits my consideration to "allegations set forth in the complaint itself, documents that are attached to the complaint, documents that are central to the complaint and are referred to in it, and information that is properly subject to judicial notice." Williamson v. Curran, 714 F.3d 432, 436 (7th Cir. 2013).

To survive BNY Mellon's motion, the complaint must "state a claim to relief that is plausible on its face." Yeftich, 722 F.3d at 915 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

II. Facts[1]

A. The Securities Lending Program

Under its "securities lending program, " BNY Mellon loaned securities owned by the Fund to third-party borrowers, and the borrowers posted collateral to secure the loans. Complaint ¶¶ 1, 12-13. Collateral could be cash, government securities, or irrevocable bank letters of credit. Complaint ¶ 12. BNY Mellon invested the cash collateral and promised the borrowers a rate of interest, called the "Borrower Rebate." Complaint ¶ 13. If the interest earned exceeded the Borrower Rebate, the excess was split between the Fund and BNY Mellon. Complaint ¶ 14. But if the investment defaulted or experienced a loss, the Fund alone was responsible for compensating the collateral pool for the shortfall. Complaint ¶¶ 14, 42. Therefore, while BNY Mellon shared in the upside benefits of the collateral investments, it bore none of the downside risk. Complaint ¶¶ 14, 42.

BNY Mellon promoted the securities lending program to the Fund as having "risk controls" and "safeguards." Complaint ¶ 9. BNY Mellon represented that its goal was to avoid relying on "aggressive investment objectives." Complaint ¶ 9. BNY Mellon asserted that, because of its focus on low risk, its clients could expect a consistent income stream without sacrificing safety. Complaint ¶ 9. Based on BNY Mellon's representations and the purpose of the arrangement, the Fund expected BNY Mellon to make very safe investments. Complaint ¶ 16.

The securities lending program was designed to earn interest for the Fund through safe investments with short-term maturity. Complaint ¶ 16. Appropriate investments were to be interest-bearing, short term, stable, highly liquid debt obligations. Complaint ¶ 16. BNY Mellon represented that investments would be made in "short-term high quality money market instruments." Complaint ¶ 9. But BNY Mellon's self-interest conflicted with the purposes of the securities lending program: because it shared in the upside benefit but not the downside risk, BNY Mellon had an incentive to pursue certain long-term investments. Complaint ¶ 14. Those investments, while typically yielding higher interest rates, increased the risk of shortfall or default-risks that the Fund alone bore. Complaint ¶¶ 14, 40.

B. The Lehman Notes

In March 2007, BNY Mellon used the cash collateral to purchase a $20 million bond note issued by Lehman Brothers Holdings, Inc. Complaint ¶ 18. The Lehman Note had a two-year term. Complaint ¶ 18. The Fund alleges that, at the time of its purchase, the Lehman Note was "substantially exposed to real estate and subprime stress." Complaint ¶¶ 18. The Fund alleges that BNY Mellon knew or should have known that Lehman was heavily invested in securities linked to the subprime mortgage market, which was known to be "in crisis during 2007 and afterwards." Complaint ¶ 22.

C. The Decline of Lehman Brothers

For the period of June 2007 to August 2007, Lehman stated that it would take write downs of $700 million. Complaint ¶ 23. By the following year, Lehman's write downs were up to $7.8 billion. Complaint ¶ 23. In 2008, Lehman reported that it had $54 billion in exposure to hard-to-value mortgage-backed securities. Complaint ¶ 23. The Fund alleges that the market anticipated Lehman's eventual collapse, as demonstrated by increasing prices of credit default swaps on Lehman Brothers. Complaint ¶ 23. The Fund also identifies the following "warning signs" concerning Lehman's financial health:

• On June 2, 2008, Standard & Poor's downgraded Lehman due to business weakness and the potential for further ...

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