COLUMBUS, Ohio (CN) – Wachovia and Wells Fargo Banks cost Ohio school workers’ pension plan $30 million by “improper investment of cash collateral as part of the securities lending program that Wachovia operated,” the pension plan claims in Federal Court. The School Employees Retirement System of Ohio, which represents non-certificated employees, calls the banks’ securities lending “Head, we win together; tails, you lose alone.”
The complaint continues: “This description reflects the fact that firms operating securities lending programs, which are typically Wall Street banks, structured the relationship so that they stood to share in whatever gains their clients made from the investments the banks made. However, their clients, which are typically public and corporate pension funds, were exposed to the exclusive risk of loss.”
(Editor’s note: An earlier posting of this story called the School Employees Retirement System a teachers’ pension plan. It is not; it is for school workers such as bus drivers, custodians, and cafeteria workers, who do not have teaching certificates.)
The retirement system claims that “Wachovia, like other firms engaged in securities lending, marketed their programs as being a low-risk way to earn small additional returns on securities held in the portfolios of public and private pension funds. Indeed, ‘these trades were supposed to be safe enough to make a little extra money at little risk,'” the complaint states, quoting an Oct. 17 story by Louise Story in The New York Times, “Banks Shared Profits, But Not Losses.” The complaint continues, quoting a managing partner of NFS Consulting Group, from the same Times article, “While the programs were marketed as being low risk, ‘What happened is that the banks got greedy and they looked at the return they were getting on the collateral and said, “Why don’t we go further with this?”‘”
The pension plan says it lost “nearly $30 million … as a result of Wachovia’s improper management of the investment of cash collateral from the securities lending program. The vast majority of these losses came from Wachovia’s investment of cash collateral in Sigma Finance Corporation (‘Sigma’) – an investment that Wachovia never should have made in the first place and/or should have liquidated long before SERS sustained losses. On November 17, 2010, SERS received a distribution of $1,261,962.98 from Sigma’s receivers, meaning that SERS lost $23,738,037.02 on the Sigma investment due to Wachovia’s conduct.”
The plaintiff says the banks violated the terms of their investment contract, which promised only low-risk, liquid investments.
Sigma’s portfolio was worth $53.5 billion in April 2007, but in October 2008, “Sigma was in receivership and its assets consisted of less than $450 million in cash while its unpaid secured liabilities were estimated to be approximately $6.2 billion,” according to the complaint.
“Sigma was not a suitable investment for SERS because of its inherent risks and lack of liquidity. …
“Wachovia also failed to disclose to SERS significant increases in the risk of holding the Sigma investment. In the second half of 2007, it became apparent that SIVs including Sigma were having problems maintaining liquidity and it was not likely to get better. These struggles continued throughout 2008 and yet at no time did Wachovia recommend that SERS sell the unsuitable investment in Sigma. Wachovia did not inform SERS that it had obtained bids for Sigma that would have allowed SERS to sell Sigma at no or very little loss.”
The 35-page complaint then details a long list of warning signs that Wachovia allegedly ignored and/or refused to inform the pension plan about.
The bank lost another $5.9 million in other lousy investments, including securitized mortgages, according to the complaint.
The pension plan seeks damages for breach of contract, negligence, negligent misrepresentation, breach of fiduciary duty, and violations of the Investment Advisers Act and the Ohio Securities Act.
The pension plan is represented by the Ohio attorney general, with the firms of Climaco, Wilcos, Peca, Tarantino & Garofoli, and Hahn, Loeser & Parks.