April 1, 2011; Source: New York Times | One of the largest charities in the country is seeking the court's help to salvage the damage from what it claims were bad investment decisions made without its approval. The New York Times reports that in its lawsuit seeking $22 million, the Salvation Army's southern division alleges that the Bank of New York Mellon's "misconduct" resulted in losses and left the charity with "unproductive, toxic assets with extended maturity dates, the values of which have substantially declined."
The Salvation Army said that instead of playing it conservatively, the Bank ignored the group's request and invested 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." The Salvation Army claims the investments were "inconsistent" with its "conservative risk profile." It added that the bank'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.”
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According to the Times, in 2009, the last year for which data is available, the Salvation Army had assets of $8.8 billion, making it one of the largest charities in the country. BNY Mellon, which has been managing the Salvation Army's money since 1997, loaned the organization's securities to short-sellers and then invested the cash it received in return as collateral for the loans.
To avoid high risk, the Salvation claims it told the bank to limit investments to "low-yielding but highly liquid products like government bonds, certificates of deposit and high-grade commercial paper." BNY Mellon spokesman Ron Gruendi called the lawsuit "without merit" and says the banks actions were "appropriate" and "our clients understand both the benefits and risks of securities lending.”—Bruce Trachtenberg