Lockheed Fiduciaries File Suit against Northern Trust

The Lockheed Martin Investment Management Co. (LMIMCo) alleges Northern Trust Co. (NTC) and Northern Trust Investments (NTI) breached their fiduciary duties by going against investment guidelines when investing the plans’ assets in Northern Trust’s securities lending program. The suit claims the violations caused the plans to lose $20 million.

According to the suit, Lockheed Martin’s plans included 22 investment options, comprised in part of six collective funds established by the Northern Trust companies, including the NTGI-QM Collective Daily Aggregate Bond Index Fund-Lending. Northern Trust described the securities lending program used in the Bond Fund as “low risk activity designed to enhance the return of an overall investment program.”

As part of the investment management contract between LMIMCo and the Northern Trust companies, LMIMCo agreed to participate in the securities lending program, but certain conditions were placed on the Northern Trust companies’ ability to use LMIMCo’s plan assets in the program, including that cash collateral pledged by borrowers would be invested at Northern Trust’s discretion in short-term instruments or in the cash collateral investment fund of Northern Trust’s “Core USA Collateral Section.”

The complaint said the contract included a “collateral schedule’ that set out LMIMCo’s investment guidelines and required that the investments meet certain liquidity, maturity, diversification, and credit quality standards. However, Northern Trust invested cash collateral generated by the lending of securities in the Bond Fund in two Northern Trust collective funds: the NTGI Collective Short Term Extendable Portfolio (STEP) and the NTGI Collective Short Term Investment Fund (STIF), and LMIMCo alleged that in late 2008 it learned the STEP Fund violated the collateral schedule’s investment guidelines.

In addition, LMIMCo said the Northern Trust companies went against the investment management contract’s terms directing that cash collateral could only be invested in short-term instruments.

The complaint further alleged that in early 2008, LMIMCo created target-date funds and approached Northern Trust in the spring of 2008 to temporarily hold approximately $240 million in amounts that were designated for the target-date funds, pending LMIMCo’s selection of a manager for those funds. Northern Trust assured LMIMCo that it could hold the target date fund assets on a temporary basis and that it would be permitted to withdraw the assets on short notice when an investment manager was selected.

However, in August 2008, when LMIMCo informed Northern Trust that the $240 million in assets would need to be wired to the new investment manager by October 1, Northern Trust refused to honor the instructions, saying that the securities held in the STEP Fund had become permanently impaired and illiquid. Northern Trust also refused LMIMCo’s request to redeem the full value of the plans’ assets in the Bond Fund.

The suit is Lockheed Martin Investment Management Co. v. Northern Trust Co., D. Md., No. 8:09-cv-01649-PJM.

Other Suits against Northern Trust

The Lockheed Martin suit is similar to other complaints filed against Northern Trust over its securities lending practices.

In October 2008, the fiduciaries of BP Corp. North America Inc.’s retirement plans accused Northern Trust Co. of breaching its fiduciary duties by not disclosing substantial securities lending losses (see “Northern Trust Hit with Securities Lending Lawsuit“). In December, FedEx Corp. accused Northern Trust and Northern Trust Investments N.A. of breaching their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by investing a large percentage of its pension plan assets in funds substantially involved in securities lending (see “Northern Trust Hit with Another Securities Lending Suit“).

Earlier this month, the Keller Rohrback L.L.P. class-action law firm announced it is investigating the Northern Trust securities lending program in relation to The 401(k) Savings and Profit Sharing Plan of The McGraw-Hill Companies; the Standard & Poor’s Employee Retirement Account Plan For Represented Employees; The TRS 401(k) Retirement Plan; the Caterpillar Inc. Tax Deferred Savings Plan; and the Caterpillar 401(k) Plan (see “Law Firm Looks into Sec Lending at Northern Trust 401(k)’).