Did Northern Trust Lose $96 Million in Pension Funds?

Los Angeles, through City Atty. Carmen A. Trutanich, filed a lawsuit against investment corporation Northern Trust NTRS on Wednesday seeking $95 million in lost pension assets. The city alleges that NTRS squandered city pension assets by placing them in high-risk financial products. As the case progresses, it will be interesting to see if it has legs. LA employed the services in Northern Trust to distribute the pension funds, so it will come down to the fine print in the contract to see if NTRS acted inappropriately or illegally when placing the city pension money. Those LA lawyers, led by Trutanich, said that the high-risk consumer debt bond products included mortgage-related securities. Officials are seeking full restitution of the $95 million, plus damages and penalties. So, in fact, they are seeking a total of more than that amount. According to the LA Times, the complaint filed to the Los Angeles County Superior Court says that, “Northern Trust made false claims and statements regarding its management of the assets of the Los Angeles City Employees' Retirement System [LACERS] in order to receive payments as a custodian bank and securities lending agent.” It is those false claims that would seem to be at the crux of the case. If Northern Trust, ironically, betrayed the trust of the city of Los Angeles, then it will be up to Trutanich and his team to prove that. Unsurprisingly, Northern Trust vigorously denies the claims. Spokesman Douglas Holt said that, in fact, the case has no merit at all and that NTRS would “vigorously defend itself against this litigation.” "The Los Angeles Employees Retirement System [LACERS] did not lose money on securities lending," Holt said. "We regret that this meritless lawsuit will likely cost the LACERS pension plan, and the city of Los Angeles, millions of dollars in unnecessary legal fees and out-of-pocket expenses." According to the Northern Trust website, it had $100 billion in banking assets, $4.3 trillion in assets under custody and $662.9 billion in assets under management at the end of 2011. Investment group ISI published a report on January 24 stating that Northern Trust has a tough quarter coming, but that it is the best positioned of the trust banks to beat 2012 consensus thanks to its strong business momentum. “We think NTRS will outperform trust bank peers in ‘12 given 1) it should have best results vs. consensus & be only trust bank to grow op EPS 10%+ in ‘12, 2) it has a more independent revenue growth story from re-pricing & organic growth, 3) it's new cost save program should enable best operating leverage in 2012, & 4) it maintains strong excess capital levels,” the report said. “With NTRS mgmt's announcement of its profit improvement program on its 1Q12 earnings call, combined with better than expected core fee revenue growth in asset servicing & PFS and continued strong organic growth trends, we've become more constructive on positive catalysts emerging earlier in 2012 for NTRS shares than we previously expected. The main driver of this view is the incremental and relatively quick impact of mgmt's profit improvement initiative on top of what are already very strong client organic growth trends heading into 2012.” Northern Trust closed at $42.15 on Wednesday, having not gained or lost at all.