On Monday, the U.S. District Judge in Manhattan rejected
The Bank of New York Mellon Corporation
) bid to dismiss a lawsuit filed by the irate securities lending
clients. These clients accused BNY Mellon of being reckless in
investing their money in the Lehman Brothers Holdings, Inc.
The plaintiffs, led by two Detroit public pensions funds - General
Retirement System of the City of Detroit and the Police & Fire
Retirement System of the City of Detroit - had indicted BNY Mellon
of taking no action to shield the $1.9 billion investments made in
the floating-rate notes of Lehman brothers in spite of the clear
signals regarding Lehman's instability in 2008.
Soon, Lehman filed for bankruptcy and it resulted in severe losses
amounting to nearly $1 billion for the plaintiffs. As a result, the
plaintiffs dragged BNY Mellon to court over their negligent
The District Judge has dismissed three out of four claims against
BNY Mellon while retaining the claim regarding the breach of
contract. This particular claim was retained since the judge
was not clear whether the securities lending agreements were good
enough to protect plaintiffs' interest or were lacking due
diligence. Further, the judge stated that the claim could be
carried forward as the plaintiffs have suffered losses worth $36
million simply because of BNY Mellon's inattentiveness.
The claims dismissed include breach of fiduciary duty and acting in
bad faith. The claim pertaining to fiduciary duty was dismissed as
the defendants had faltered in meeting the three-year deadline to
file the lawsuit by waiting till September 12, 2011. Further, the
district judge opined that the bankruptcy was not the immediate
cause of the damages suffered by the defendants.
Other Institution Haunted by Lehman
The Lehman disaster seems to have a never-ending effect on the
institutions, which were associated with the company when it filed
for bankruptcy in 2008. Earlier in April 2012, it was
JPMorgan Chase & Co.
), which faced the wrath of the U.S. Commodity Futures Trading
Commission (CFTC) for allegedly over-extending credit to Lehman for
almost two years (November 2006-September 2008) resulting in misuse
of customers' money. Consequently, JPMorgan will pay a fine of $20
million to the CFTC.
The dismissal of most of the claims relating to the case allows BNY
Mellon to breathe a sigh of relief. However, the pending claim, if
proven, would result in penalties and dent the image of the
company. Further, the company is facing a deluge of lawsuits
associated to its foreign exchange transactions.
Although some of these claims have been dismissed, BNY Mellon
remains under tremendous pressure due to the rising expenses. These
lawsuits would further increase its costs. In addition, these
litigations will force the clients to reconsider their business
ties with the company.
BANK OF NY MELL (BK): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
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BNY Mellon currently retains a Zacks #3 Rank, which translates into
a short-term Hold rating. Considering the fundamentals, we also
maintain a long-term Neutral recommendation on the stock.