Irell & Manella client Pacific Select Fund, a division of Pacific Life Insurance Company, achieved a favorable ruling in its lawsuit against Bank of New York Mellon (“BNYM”) for losses incurred by BNYM’s mismanagement of a large securities lending program.

Judge Josephine Tucker of the Central District of California granted Pacific Select Fund’s (“PSF”) motion for partial summary judgment, ruling that BNYM owes $20 million to PSF under a “negative earnings” reimbursement agreement from which BNYM attempted to walk away. The court also denied BNYM’s motion for summary judgment related to PSF’s assertions that BNYM breached the securities lending agreement, breached its fiduciary duties, was professionally negligent, and violated section 17200 of the California Business and Professions Code.

According to John Hueston, an Irell & Manella partner and attorney for PSF, “This substantial judgment is a major step forward for our client, Pacific Select Fund, which suffered tens of millions in losses due to the Bank of New York Mellon’s multiple breaches.”

In the lawsuit filed in the Central District court in February 2010, PSF alleged that the BNYM caused PSF—a participant in the defendants’ securities lending program—to incur substantial losses relating to risky investments made by the defendants in medium-term notes of Sigma Finance Inc. The investments were held in a securities lending cash collateral pool managed by BNYM.

PSF alleges, among other things, that BNYM (1) would only permit PSF to exit the pool in-kind, as opposed to in cash, but nonetheless permitted other participants in the pool to exit in cash, despite assurances that it would not do so and without notifying PSF; (2) breached the securities lending agreement and acted imprudently by investing in Sigma and then continuing to hold the notes; (3) breached its fiduciary duties by failing to disclose material information to PSF about its investments in Sigma and by taking actions on behalf of its other clients to PSF’s detriment; and (4) breached the negative earnings agreement by failing to reimburse PSF for negative earnings sustained as a result of the Sigma losses. Pacific Select Fund asserts claims for professional negligence, breach of fiduciary duty, breach of contract, breach of the covenant of good faith and fair dealing, and violations of the California Business and Professions Code §§ 17200, et seq. 

The trial is scheduled to begin in April. The Irell & Manella team includes John Hueston, Alison Plessman, Jeremiah Kelman, Kevin Winzer, Bret Hembd and Christopher Vieira.