(Reuters) - BNY Mellon Corp said it settled a lawsuit by investors that accused the bank of imprudently investing their cash in a risky debt vehicle that collapsed in 2008, and the bank recorded a $350 million pre-tax charge partly related to the settlement.
The settlement is connected to the collapse of Sigma Finance Corp, a $27 billion investment fund created by London-based Gordian Knot Ltd. The structured investment vehicle (SIV) failed in October 2008 at the height of the global financial crisis.
Under a securities lending program, the bank invested and lost a substantial portion of cash collateral in medium-term notes issued by Sigma Finance, according to the class-action lawsuit filed by CompSource Oklahoma.
BNY Mellon said the charge, which it recorded in its second quarter, includes a potential payment of $280 million to settle the Sigma-related class action.
JPMorgan Chase & Co in March agreed to pay $150 million to settle a lawsuit by pension funds and other investors relating to its investments in the same fund.
A securities lending program typically lets an investor lend securities to a broker-dealer in exchange for cash that a bank invests on behalf of the investor.
SIVs typically used short-term borrowings to make higher-yielding long-term investments. Many buckled as short-term credit markets tightened or froze in 2007 and 2008.
“We are putting this litigation behind us, with no significant impact on our capital position, while continuing to make headway on other matters,” said Gerald Hassell, chief executive officer of BNY Mellon, in a statement.
The settlement is subject to court approval.
The company also said that after a review of the recently released Basel III rulemaking, it estimates that it will have to increase its Basel III Tier 1 common equity ratio by over 100 basis points.
The case is In re: CompSource Oklahoma, et al v BNY Mellon and The Bank of New York Mellon, U.S. District Court, Eastern District of Oklahoma, No.09-469.
Shares of the company were down 6 cents at $21.91 on Friday on the New York Stock Exchange.
Reporting by Tanya Agrawal in Bangalore; Editing by Saumyadeb Chakrabarty