(Reuters) - Bank of New York Mellon Corp (BK.N) lost a bid to dismiss a lawsuit by securities lending clients who claimed losing more than $1 billion because the bank imprudently invested their collateral in Lehman Brothers Holdings Inc debt.
U.S. District Judge Richard Sullivan in Manhattan on Monday refused to dismiss a breach of contract claim, while dismissing claims over whether the world’s largest custodial bank breached fiduciary duties or acted in bad faith.
Clients led by two Detroit public pension funds accused the New York-based bank of taking no action by 2008 to protect $1.9 billion of investments it had made on their behalf in Lehman floating-rate notes, despite warning signs and growing concerns about Lehman’s stability.
Lehman filed for bankruptcy protection on September 15, 2008, a major trigger of that year’s global financial crisis.
Bank of New York Mellon spokesman Kevin Heine said: “We’re pleased the court dismissed three out of the four claims and we will vigorously defend against the remaining claim.”
Samuel Rudman, a lawyer for the plaintiffs, did not immediately respond to a request for comment.
In letting the breach of contract claim go forward, Sullivan said it is unclear whether the securities lending agreements forbade the bank from acting negligently, as the plaintiffs argued, or simply set forth a more general standard of care.
He said the claim could go forward because the Detroit funds alleged more than $36 million of losses as a result of the bank having “acted negligently in wielding its considerable discretion” under the securities lending agreements.
Sullivan also said the plaintiffs missed a three-year deadline to allege breach of fiduciary duty claims by waiting until September 12, 2011 to file its lawsuit, which sought class-action status.
“Although the magnitude of the damages might have been greater following Lehman’s bankruptcy,” Sullivan wrote, “the bankruptcy itself was not the first event by which plaintiffs could have, by their own theory of the case, alleged damages.”
Custodial banks provide back-office and other services including accounting, asset valuations, currency trading, portfolio servicing and stock lending.
The case is Board of Trustees of and on behalf of the General Retirement System of the City of Detroit et al v. BNY Mellon NA et al, U.S. District Court, Southern District of New York, No. 11-06345.
Reporting by Jonathan Stempel in New York; Editing by Gary Hill, Bernard Orr