The city paid the asset manager $95.8 million last year for losses in a fund in which Northern Trust invested the pension fund's collateral that it received for its securities that Northern Trust loaned to short sellers, City Attorney Carmen Trutanich said in a complaint filed Wednesday in state court in Los Angeles.
The collateral, the profits of which get split between the pension fund and the asset manager, were supposed to be invested in a way that would produce minimum risk, according to the complaint. Instead, Northern Trust, which didn't share in the losses from the invested collateral, put them in highly risky investments, according to the complaint.
"Northern Trust placed its interests in making a profit ahead of the interests of Los Angeles City Employees' Retirement System in preserving capital because Northern Trust had, from its point of view, nothing to lose and everything to gain by making risky investments," Trutanich said in the complaint.
Subprime Loans
Northern Trust, based in Chicago, didn't tell the city how it invested the collateral until after it reported the losses that the city had to pay, according to the complaint. The losses related to investments in bonds and notes "whose revenue was based upon mortgage-origination, or subprime mortgage loans, or the housing market itself," according to the complaint.
The city's losses included $46 million from Washington Mutual-related investments and $20 million from investments related to Lehman Brothers Holdings Inc., according to the complaint.
Doug Holt, a Northern Trust spokesman, said in an e-mailed statement that the lawsuit had no merit.
"The city attorney's suit, brought years after the losses were incurred, is based solely on hindsight and is premised on the legally deficient claim that Northern Trust should have predicted these unprecedented events even though the markets as a whole had not," Holt said.
Los Angeles seeks civil penalties and triple damages for false claims it says Northern Trust made as well as civil penalties and restitution on its unfair business practices claims.
The case is The People v. Northern Trust, BC478165, Los Angeles County Superior Court.
