The Bank of New York Mellon Corporation
) is the latest financial institution to settle the class-action
lawsuit related to Sigma Finance Inc., a risky debt vehicle that
tanked in 2008. BNY Mellon has agreed to a $280 million settlement,
which still awaits court approval.
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BNY Mellon was sued in the federal court in Oklahoma by CompSource
Oklahoma, a state's workers' compensation insurance firm. It
claimed that the company irresponsibly invested the money in
medium-term notes issued by Sigma and lost significant amount of
cash collateral when the commercial paper markets froze during the
height of the financial crisis.
Sigma, a structured investment vehicle (SIV), was formed by
UK-based Gordian Knot Ltd. When Sigma failed in 2008, it had about
$1.9 billion as security for nearly $6.2 billion of medium-term
notes and other debts.
Generally, SIVs used short-term lending to invest in high yielding
long-term securities. Nevertheless, during the financial crisis
these SIVs were severely hit and the majority of them collapsed,
thereby leading to huge losses to investors.
Earlier this year,
JPMorgan Chase & Co.
) agreed to pay $150 million to settle a similar suit for investing
the money in Sigma. The plaintiffs in the case included the
American Federation of Television and Radio Artists (AFTRA)
Retirement Fund, the Bronx Surface Transit Operating Authority
Pension Fund and the Imperial County Employees' Retirement System.
Apart from BNY Mellon and JPMorgan,
Wells Fargo & Company
) is the other bank that has been sued for its failed investments
in Sigma. Further, cases have also been filed against the rating
agencies - Moody's Investors Service, the ratings unit of
), and Standard & Poor's (S&P) - for their 'AAA' ratings on
Separately, in the second quarter of 2012, BNY Mellon would be
taking a charge of $350 million ($210 million after-tax), mostly
related to the settlement of Sigma litigation. Additionally, the
company stated that after reviewing the recently released capital
rules, its Basel III Tier 1 common equity ratio would increase more
than 1%, mainly attributable to estimated reduction in
risk-weighted assets related to securities portfolio. As of March
31, 2012, Basel III Tier 1 common equity ratio was 7.6%.
BNY Mellon is scheduled to release its second quarter results on
July 18. We believe that the above-mentioned charge will not have
any substantial adverse impact on the results. The company's top
line will benefit from various restructuring initiatives and
acquisitions. However, a low interest rate environment, rising
operating expenses and changing regulatory landscape are the major
causes of concern.
Currently, BNY Mellon retains a Zacks #3 Rank, which translates
into a short-term Hold rating.