April 23, 2024

Salvation Army Accuses Bank of Mismanaging Its Assets

“As a result of BNY Mellon’s misconduct, the Salvation Army has incurred losses and is left holding unproductive, toxic assets with extended maturity dates, the values of which have substantially declined,” the organization said in a lawsuit filed on Friday. “The Salvation Army cannot now devote those assets to its many charitable projects.”

The organization, with its four divisions, is one of the largest charities in the country, with assets of $8.8 billion in 2009, the latest year for which financial data is available.

In 1997, the Salvation Army hired BNY Mellon to maintain custody of securities it owned, and shortly thereafter, agreed to participate in a securities lending program. Under that program, the organization’s securities were lent to short-sellers in exchange for cash collateral, which the bank then invested.

“We believe our actions were appropriate, and we will defend ourselves vigorously against these claims, which are without merit,” said Ron Gruendl, a spokesman for BNY Mellon. “We have a very rigorous process, and our clients understand both the benefits and risks of securities lending.”

The Salvation Army said in its lawsuit that it had no previous experience with securities lending and thus “emphasized to BNY Mellon that it wanted little or no risk as a result of participating in the program.”

When the securities in such programs are returned, the collateral that was posted is returned to the borrower and the lender keeps any returns made on it — or makes up any losses.

In its lawsuit, the organization said that the list of approved investments offered to it by the bank included low-yielding but highly liquid products like government bonds, certificates of deposit and high-grade commercial paper. Instead, it said, the bank invested the collateral in securities backed by subprime and other risky mortgages as well as floating-rate notes of highly leveraged companies like Lehman Brothers, the CIT Group and the insurer American International Group.

“These investments were inconsistent with the conservative risk profile of the Salvation Army,” the organization said in the lawsuit. “Moreover, BNY Mellon’s decision to overweight the Salvation Army’s portfolio heavily in favor of asset-backed securities tied to the housing market and financial services companies violated basic principles of prudent investing.”

The lawsuit noted that in a meeting last July, the bank’s chief executive, Robert P. Kelly, stated that the Salvation Army had pushed for higher yields on the securities-lending account, but it denied that such a request was ever made by the charity.

Article source: http://feeds.nytimes.com/click.phdo?i=5be1aa0f480bdacd5695ff11f1282ae0

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