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BNY Mellon will pay $19M in Pa. settlements

| Friday, Feb. 28, 2014, 7:57 p.m.

Bank of New York Mellon will pay $19 million to the state treasury and two public pension systems in a final settlement of losses from a complex investment arrangement that collapsed in 2008.

Under the settlement, BNY Mellon will remain the state's custodian, holding all securities for the state, the State Employees' Retirement System and the Public School Employees' Retirement System. The state treasury previously recovered $22 million in fees from BNY Mellon and $6.4 million from Sigma Finance Inc. of London.

Losses to the three agencies totaled $133.4 million following Sigma's collapse.

The former Mellon Bank and the Treasury Department entered a securities lending contract in 1998, with the state making nearly $404 million from 1999 to 2008, according to Treasurer Rob McCord's office.

In a statement, McCord called the settlement “the best possible deal,” because it avoids a costly lawsuit that could have brought less money.

The settlement was approved by the state attorney general and the boards of the pension systems, he said.

McCord's spokesman, Gary Tuma, said the total recovered, $47.4 million, or 35.5 percent of the loss, compared to a recovery of 28.5 percent in an Oklahoma case involving Sigma, and a median of 3.5 percent nationally in similar lawsuits from 1996 to 2012.

“Obviously, many public and private funds suffered significant and permanent losses when the Great Recession hit,” McCord said.

A new custodial agreement with BNY Mellon can be terminated by the state with a 180-day notice, Tuma said. An amended securities lending agreement “establishes a stronger standard of care, specifically laying out the bank's fiduciary responsibility so that in the future there wouldn't be a debate over what should or shouldn't have happened,” Tuma 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,” said George Gilmer, head of asset servicing for BNY Mellon.

In July 2012, New York-based BNY Mellon settled a class-action lawsuit for $280 million that CompSource Oklahoma, a state workers' compensation insurance company, initiated after losing money invested with Sigma. BNY Mellon recorded a second-quarter 2012 expense of $210 million to cover that settlement, causing a 37 percent drop in net income.

John D. Oravecz is a staff writer for Trib Total Media.

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