The Pennsylvania state workers' (SERS) and teachers' (PSERS) pension funds will collect a total of $19 million from BNY Mellon Corp. to cover a part of the $133.4 million they and the state Treasury lost investing in British hedge fund Sigma Finance Inc.
Under secruities-lending agreements with Pennsylvania and other states and retirement plans, Sigma "recklessly" borrowed and bet billions in U.S. retirement plan assets and other investor cash into Wall Street debt and other financial instruments that lost value in the financial crisis of 2007-08. The bank has already repaid the Pennsylvania Treasury an additional $22 million in fee reimbursements. Plus the funds collected $6.4 million directly from Sigma, state treasurer Rob McCord said in a statement.
Despite the losses, McCord's office has signed "a new custodial and an amended securities lending agreement with BNY Mellon," the statement added. George Gilmer, Head of Asset Servicing – Americas for BNY Mellon, said, "We are pleased to reach an agreement with Treasury that resolves our issues and allows us to continue our long-standing relationship with the Commonwealth of Pennsylvania," George Gilmer, BNY Mellon's head of asset servicing (Americas), said in the statement.
McCord called the payout, achieved without hiring outside lawyers, "the best possible deal for the public and for our retirees." It would have cost more, with "unpredictable" results, to sue the bank, he added.
"While investment losses are always unfortunate, I'm pleased that we were able to cooperate with BNY Mellon to mitigate those losses for Pennsylvania, and continue to partner with BNY Mellon as our custodial financial institution," McCord concluded.
"Between 1999-2007, the commonwealth had earned an average of $40.4 million per year on such transactions," McCord spokesman Gary Tuma told me. "But when the markets began to decline in 2007, with the problems first appearing in the mortgage markets and then spreading to other types of investments in 2008, the cash collateral investment in Sigma fell. The loss reached $133.4 million.
"Although investments always involve some risk," McCord and the pension systems maintained "that BNY-Mellon should have informed the state of the losses in a more timely manner and should have taken some steps to mitigate the losses before they became as bad as they were."
McCords started negotiations for getting back some of the lost money after he took office in 2009. According to Tuma: "The cash recovery plus the clawback of fees plus the residual amount returned by Sigma totals $47.4 million, or 35.5 percent of the loss."
Just 35.5%? "This stacks up pretty well, we think, against some similarly situated recoveries. An Oklahoma case in 2012 by multiple investors in a BNY-Mellon pooled security lending agreement produced a 28 percent return. The median class action settlement as a percentage of investor loss in cases between 1996-2012 was only 3.5 percent."