Posted on Wednesday, January 30th, 2013 | In Stocks to Watch
Recently, The Supreme Court of the State of New York has rejected a dismissal plea of The Bank of New York Mellon Corporation (BK). A lawsuit was filed by The Salvation Army accusing BNY Mellon of mismanaging funds.
The New York Judge has sustained three out four claims in the Salvation Army's lawsuit against BNY Mellon's gross negligence, breach of fiduciary duty and breach of contract. However, the claim for negligent misrepresentation was dismissed. The Salvation Army is seeking $22 million in compensation.
In Apr 2011, the southern division of the Salvation Army had filed the lawsuit alleging gross ignorance on part of BNY Mellon regarding the investment of the charity's funds. The Salvation Army's instructions of investing in less risky avenues were not followed by the bank. Rather, BNY Mellon went ahead and invested funds in perilous mortgage-backed securities. Consequently, when the markets collapsed, the Salvation Army suffered huge losses.
In its defense, BNY Mellon was quick to point that the investment strategy at during that particular period was prudent enough and it had meticulously executed the investment of the charity's funds. Further, the bank added that it was willing to challenge the charges in the court.
Presently, BNY Mellon is not the only bank facing problems over investment in mortgage-backed securities prior to 2008 financial crisis. Many financial institutions including JPMorgan Chase & Co. (JPM), The Goldman Sachs Group, Inc. (GS) and Bank of America Corporation (BAC) have been embroiled in lawsuits over similar practices.
The litigation cost involved will definitely lift up BNY Mellon's expenses. In addition, the company faces numerous foreign exchange-related lawsuits, which will keep the litigation costs at elevated levels, thereby thwarting the efforts made by the company to contain the rising expenses.
Presently, BNY Mellon holds a Zacks Rank #4 (Sell).
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