The Bank of New York Mellon Corporation (BK) is the latest financial institution to settle the class-action lawsuit related to Sigma Finance Inc., a risky debt vehicle that tanked in 2008. BNY Mellon has agreed to a $280 million settlement, which still awaits court approval.
BNY Mellon was sued in the federal court in Oklahoma by CompSource Oklahoma, a state’s workers’ compensation insurance firm. It claimed that the company irresponsibly invested the money in medium-term notes issued by Sigma and lost significant amount of cash collateral when the commercial paper markets froze during the height of the financial crisis.
Sigma, a structured investment vehicle (:SIV), was formed by UK-based Gordian Knot Ltd. When Sigma failed in 2008, it had about $1.9 billion as security for nearly $6.2 billion of medium-term notes and other debts.
Generally, SIVs used short-term lending to invest in high yielding long-term securities. Nevertheless, during the financial crisis these SIVs were severely hit and the majority of them collapsed, thereby leading to huge losses to investors.
Earlier this year, JPMorgan Chase & Co. (JPM) agreed to pay $150 million to settle a similar suit for investing the money in Sigma. The plaintiffs in the case included the American Federation of Television and Radio Artists (:AFTRA) Retirement Fund, the Bronx Surface Transit Operating Authority Pension Fund and the Imperial County Employees' Retirement System.
Apart from BNY Mellon and JPMorgan, Wells Fargo & Company (WFC) is the other bank that has been sued for its failed investments in Sigma. Further, cases have also been filed against the rating agencies – Moody’s Investors Service, the ratings unit of Moody’s Corp. (MCO), and Standard & Poor’s (S&P) – for their ‘AAA’ ratings on Sigma.
Separately, in the second quarter of 2012, BNY Mellon would be taking a charge of $350 million ($210 million after-tax), mostly related to the settlement of Sigma litigation. Additionally, the company stated that after reviewing the recently released capital rules, its Basel III Tier 1 common equity ratio would increase more than 1%, mainly attributable to estimated reduction in risk-weighted assets related to securities portfolio. As of March 31, 2012, Basel III Tier 1 common equity ratio was 7.6%.
BNY Mellon is scheduled to release its second quarter results on July 18. We believe that the above-mentioned charge will not have any substantial adverse impact on the results. The company’s top line will benefit from various restructuring initiatives and acquisitions. However, a low interest rate environment, rising operating expenses and changing regulatory landscape are the major causes of concern.
Currently, BNY Mellon retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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