Northern Trust sued by pension funds over cash collateral reinvestment losses; suit alleges “flagrant violation”

Northern Trust has been sued by the Public School Teachers’ Pension & Retirement Fund of Chicago and the City of Atlanta Firefighters’ Pension Plan, over claims that the bank broke its cash collateral reinvestment pledges.

According to the lawsuit, Northern Trust failed to adhere to the pension funds’ request that the cash collateral be reinvested in “conservative, highly liquid, ultra-short term investment funds”. Instead, “in flagrant violation of its duties”, Northern Trust was said to have “locked those funds into risky, long-term investments – including hundreds of millions of dollars of unregistered, illiquid securities that plummeted in value”.

The Chicago Teachers’ Pension Fund said that the loss the bank suffered was “small compared to the USD9.2 billion value of [its] portfolio” but felt that litigation was in the “best interest” of its members.

It is not the first time that Northern Trust has been sued over its cash collateral reinvestment programme; the University of Washington fund sued the bank in September 2008 and a number of other pension funds have followed suit. Other custodians have faced lawsuits relating to their securities lending programmes since the onset of the credit crunch.

No one at Northern Trust was immediately available for comment.