Court case throws up implication for lending agents
19 December 2013 New York
Image: Shutterstock
In their analysis of the court case between AP-Fonden and BNY Mellon, law firm RPC has stated that the judgement against the bank underscores the need for securities lending agents to act fairly when communicating with their clients.
In October, the Commercial Court in London awarded undisclosed damages to Swedish fund F枚rsta AP-fonden (AP1), after action was lodged by the fund in response to losses incurred as a result of securities lending transactions handled by BNY Mellon.
The judge noted in the ruling that BNY Mellon failed in its care when handling the fund鈥檚 mandate, which was to act as manager of AP's cash collateral investment portfolio and would perform its duties with "care, skill, prudence and diligence".
In March and April 2007 BNY Mellon acquired two tranches of medium-term notes issued by Sigma Finance, a structured investment vehicle, for AP's account as collateral.
Sigma began to experience financial difficulties and the price of its medium-term notes declined sharply.
The bank told AP about Sigma's difficulties, but maintained that it was confident that the Sigma medium-term notes would continue to perform and pay out on maturity. However, at the same time BNY Mellon was warning other clients of the potential risk to their portfolios and recommending alternative solutions in relation to their Sigma medium-term note investments.
In particular, BNY Mellon wrote letters to other clients stating that "there is a significant likelihood that Sigma will not be able to continue to meet its commitments in respect of the Sigma notes in the medium term".
The judge found that although there was no deliberate attempt to mislead, BNY Mellon鈥檚 communications had given rise to misrepresentations and negligent misstatements.
In a report, Leonora Howard and Jonathan Cary of RPC stated that although the judgement confirmed that a securities lending agent generally does not owe its clients a fiduciary duty, an agent is required to provide its clients with a fair assessment of the situation once it becomes aware that an investment is at serious risk of default that would result in significant losses to the client.
鈥淚n this case, that BNY Mellon did not do so was brought into sharp relief by the fact that it provided quite different information and guidance to other clients in the same position.鈥�
鈥淭he case also stands out as one of the rarer examples in which a bank has been found liable for losses resulting from false representations in the wake of the financial crisis.鈥�
In October, the Commercial Court in London awarded undisclosed damages to Swedish fund F枚rsta AP-fonden (AP1), after action was lodged by the fund in response to losses incurred as a result of securities lending transactions handled by BNY Mellon.
The judge noted in the ruling that BNY Mellon failed in its care when handling the fund鈥檚 mandate, which was to act as manager of AP's cash collateral investment portfolio and would perform its duties with "care, skill, prudence and diligence".
In March and April 2007 BNY Mellon acquired two tranches of medium-term notes issued by Sigma Finance, a structured investment vehicle, for AP's account as collateral.
Sigma began to experience financial difficulties and the price of its medium-term notes declined sharply.
The bank told AP about Sigma's difficulties, but maintained that it was confident that the Sigma medium-term notes would continue to perform and pay out on maturity. However, at the same time BNY Mellon was warning other clients of the potential risk to their portfolios and recommending alternative solutions in relation to their Sigma medium-term note investments.
In particular, BNY Mellon wrote letters to other clients stating that "there is a significant likelihood that Sigma will not be able to continue to meet its commitments in respect of the Sigma notes in the medium term".
The judge found that although there was no deliberate attempt to mislead, BNY Mellon鈥檚 communications had given rise to misrepresentations and negligent misstatements.
In a report, Leonora Howard and Jonathan Cary of RPC stated that although the judgement confirmed that a securities lending agent generally does not owe its clients a fiduciary duty, an agent is required to provide its clients with a fair assessment of the situation once it becomes aware that an investment is at serious risk of default that would result in significant losses to the client.
鈥淚n this case, that BNY Mellon did not do so was brought into sharp relief by the fact that it provided quite different information and guidance to other clients in the same position.鈥�
鈥淭he case also stands out as one of the rarer examples in which a bank has been found liable for losses resulting from false representations in the wake of the financial crisis.鈥�
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