Los Angeles officials alleged in a lawsuit this week that they were misled by a longtime investment bank trying to protect its own financial interests, resulting in more than $95 million in losses to a city employee pension fund.
City Atty. Carmen A. Trutanich said the Northern Trust Corp. shifted city money into more risky real estate and other investments without fully disclosing the danger to pension managers.
The lawsuit also targets Pension Consulting Alliance Inc., a company that was contracted by the Los Angeles City Employees' Retirement System to serve as its own investment consultant.
The city attorney blames the group for "knowingly or recklessly failing to warn LACERS that Northern Trust was engaging in inappropriate, high risk investments in consumer debt and long-term mortgage securities."
The complaint, filed in Los Angeles County Superior Court, argues that Northern Trust and the consulting group violated the False Claims Act and engaged in unlawful business practices. The lawsuit seeks full restitution as well as damages, civil penalties and fines.
"Northern Trust promised and represented that the investments it made for LACERS in the securities lending program were 'low risk,' and 'safe,' involving 'a stringently managed risk' that 'enhanced performance' with 'minimized risk,' " according to the complaint.
City officials said Northern Trust later urged pension fund managers to stand pat while knowing they were facing potential losses.
Doug Holt, a spokesman for the investment bank, which has $100 billion in banking assets, $4.3 trillion under custody and $662.9 billion under management, said the lawsuit has no merit and that the corporation would vigorously defend itself.
Holt said that the losses the employees pension fund experienced were mostly due to investments in fixed-income securities from Lehman Brothers Holdings Inc., Washington Mutual Bank, and CIT Group Inc.and that those investments were within guidelines set by the pension fund.
"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.
The city pension fund "did not lose money on securities lending," Holt said. "We regret that this meritless lawsuit will likely cost the LACERS pension plan, and the city of Los Angeles, millions of dollars in unnecessary legal fees and out-of-pocket expenses."
But officials maintain Northern Trust followed a "Heads, we win together, tails, you lose alone" strategy while pursuing high-risk investments that cost the city dearly, according to the lawsuit.
Northern Trust has been the primary custodian of the pension fund's assets since 1991 and acts as an independent manager of the pension group's securities lending program, city officials said. The system manages retirement benefits for more than 27,000 current and 17,000 retired public employees, according to the group's website.
City officials have increasingly used the general fund, which pays for basic services, to cover the growing cost of retirement benefits for civilian and public safety employees.
At a news conference Thursday morning, Trutanich said the investment firm was "motivated by greed and a desire to increase their own bottom line."
He also said that "during this time, our watchdog was sleeping."
Pension Consulting, which is no longer working with the city pension fund, released a statement later in the day denying the allegations and saying that they "had no responsibility for the losses incurred by LACERS in its securities lending portfolio."