Securities lending: Cui bono?

The question of whether the securities lending game is worth the candle is thrust firmly into the spotlight with the news this week from Philadelphia that Counsel for Plaintiffs have reached a $36m settlement with Northern Trust Company and Northern Trust Investments (subject to court approval).

Securities lending, apologists for which say it has long been misunderstood and unfairly blamed for market events involving the likes of Orange County and disgraced tycoon Robert Maxwell, is nothing if not controversial.

For every fan who argues that it improves market liquidity and efficiencies, there is an opponent who will point to the havoc that it seems to help to wreak, as in the case of a lawsuit that began on March 30 2009 when Joseph L Diebold filed a putative class action in the United States District Court, Northern District of Illinois, and has yet to reach its final resolution.

The question of whether an additional few basis points on a portfolio's return really be worth the expense and inconvenience that all parties to the case must have experienced throughout that time will surely be the subject of much debate.

In the meantime, and very much for the record, Berger & Montague PC, a self-proclaimed specialist in complex class actions, provides a succinct summary of the facts as they currently stand.

“The lawsuit alleges that Northern Trust breached its duties to retirement plans and their participants and beneficiaries. According to Plaintiffs, Northern Trust imprudently invested collateral received from securities lending activities and, in addition, charged impermissibly high fees. Northern Trust denies any liability.

“The proposed settlement has been achieved on behalf of retirement funds that invested in Northern Trust's Commingled Lending Funds, which participated in Northern Trust's securities lending program, during the period January 1, 2007 through October 31, 2010. Plaintiffs brought suit under the Employee Income Security Retirement Act (ERISA).

“The case is Diebold, et al. v. Northern Trust Investments, N.A. et al., No. 09-Civ-1934 (Diebold), pending before Judge Charles Norgle in the United States District Court for the Northern District of Illinois.

“Final settlement in Diebold is conditioned on final approval of the partial settlement of a related case, Louisiana Firefighters' RetirementSystem, et al. v. Northern Trust Investments, N.A., et al., Civil Action No. 09-7203A (Louisiana Firefighters), which is also pending in the Northern District of Illinois. Louisiana Firefighters asserts claims based on many of the same facts and circumstances underlying the claims in Diebold, but on behalf of entities that are not subject to ERISA.

“Northern Trust has expressly denied and continues to deny all assertions of wrongdoing or liability against them arising out of any of the conduct, statements, acts, or omissions alleged, or that could have been alleged.

The Settlement Class, appointed by the Court, is represented by Bailey & Glasser, LLP, Berger & Montague, P.C., and Peiffer Rosca Wolf Abdullah Carr & Kane, APLC.

Northern Trust is represented by Winston & Strawn LLP and Mayer Brown LLP.

As they say in legal circles, cui bono?