Bank of New York Mellon has become the latest bank to settle a lawsuit relating to Sigma Finance, the complex debt fund that collapsed during the depths of the financial crisis.
The world’s largest custody bank agreed to pay up to $280m to settle allegations that it imprudently invested and lost customer money in Sigma, BNY Mellon said on Friday. The bank said it expects to take a pre-tax charge of $350m in the second quarter because of the settlement, which is subject to court approval.
Sigma was the last of the infamous “structured investment vehicles,” or SIVs, when it failed in October 2008. Such SIVs borrowed cheap money in the short term commercial paper market and then invested in higher-yielding assets such as repackaged debt to make a profit. But the vehicles were hard-hit in the crisis.
BNY Mellon had invested some of its clients’ money in medium-term debt issued by Sigma as part of the custodian bank’s securities lending programme, which reinvests the cash that clients earn by lending out assets such as stocks and bonds.
CompSource Oklahoma, the compensation insurance company which filed the class-action lawsuit, alleged that BNY Mellon failed to invest the cash collateral “conservatively and prudently” when it bought the Sigma notes on behalf of clients.
JPMorgan Chase agreed earlier this year to pay $150m to settle a similar lawsuit.
“The Sigma settlement agreement reflects the meaningful progress we are making in navigating the litigation environment that affects our company and the industry overall,” said Gerald Hassell, chairman and chief executive of BNY Mellon. “We are putting this litigation behind us, with no significant impact on our capital position, while continuing to make headway on other matters.”
The bank also said that it expects to increase its Basel III regulatory capital ratio by 100 basis points, as a result of recently released US guidelines.
The increase is “due to the estimated reduction in risk-weighted assets related to the company’s securities portfolio”, the bank said. Credit Suisse analysts said the increase is related to a less harsh treatment of the sub-investment grade assets which make up about 5 per cent of BNY Mellon’s securities portfolio.
When commercial paper markets froze in late 2008, Sigma began relying on bank financing provided through so-called “repo markets” for its funding. But when banks began to experience their own funding problems, many SIVs began to fail.
Liquidators for the Sigma portfolio said in 2010 that the SIV held debt securities with a face value of about $1.9bn when the vehicle collapsed. But the sale value of the portfolio “was far below” face value and Sigma had about $6bn worth of debt, including the medium-term notes bought by BNY Mellon on behalf of its clients.
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