Pensions Say Northern Trust Blew Millions, Took Huge Cut

CHICAGO (CN) - Northern Trust exposed schoolteachers' and firefighters' pension plans to billions of dollars in losses while "taking up to 40 percent of the earnings" when the investments did make money, a class action claims in Federal Court. Chicago schoolteachers and Atlanta firefighters say Northern Trust mismanaged their pension plans "in flagrant violation of its duties," by locking them into high-risk, long-term investments, instead of short-term, highly liquid investments as expected.

The Public School Teachers' Pension & Retirement Fund of Chicago, along with the City of Atlanta Firefighters' Pension Plan, say Northern Trust disregarded their best interests because it could financially benefit from the high-risk investments, including a securities-lending program, "taking up to 40 percent of the earnings" from the collateral pools as part of its compensation scheme.

Despite warnings from Northern's own chief economist, beginning around 2004, the company invested the collateral pools in "hundreds of millions of dollars of securities backed by mortgages and other consumer loans" and "exotic, unregistered securities," and "billions more in securities issued by banks with massive exposure to mortgages and consumer loans," according to the 43-page complaint.

The class claims that even though the collateral pools suffered unrealized losses in 2007 and 2008, due to "the subprime mortgage collapse and growing financial crisis," Northern refused to sell securities at a loss because it would have been forced to consolidate the pools, which may have resulted in a multibillion-dollar loss for itself.

Northern "continued to hold high-risk securities in the mere hopes that the issuers of those securities would survive the financial crisis," the class claims.

In April 2008, Northern declared that it would not sell such investment vehicles any longer; this was just months before the securities lending program saw "massive realized losses," according to the complaint.

Northern then decided to limit withdrawals from the pools, under the notion that the massive losses "impaired" the pool's liquidity, the complaint states. Northern bad the brass to blame program participants for the disaster, and unfairly seized their earnings and demanded millions of dollars from them to "offset the realized losses," the class adds.

The Public School Teachers' Pension has $9.2 billion in assets under management, according to the complaint.

The class claims that the investment of collateral from Northern's securities lending program "was intended to generate only modest returns, with a primary focus on preservation of capital and liquidity." It says that Northern agreed to "indemnify and hold harmless" participants for losses, if it happened to stray from its promise to invest the cash collateral in "safe, liquid instruments."

Although "the damages suffered by each individual class member may be relatively small," the complaint states, they include "hundreds of millions of dollars of unregistered, illiquid securities that plummeted in value."

The pension plans sued Northern Trust Investments and the Northern Trust Company for breach contract and fiduciary duty, and breach of good faith and fair dealing. They demand that the withdrawal limitations on the collateral pools be lifted, and the return of their seized earnings.

Their lead counsel is Avi Josefson with Bernstein Litowitz Berger & Grossmann.

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