Salvation Army Complaint Against Bank of New York Mellon Stands

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Jan 29, 2013, 11:47 ET

NY Supreme Court Decision Supports Claims of "Gross Mismanagement" of Securities Lending Portfolio

ATLANTA, Jan. 29, 2013 /PRNewswire-USNewswire/ -- The Supreme Court of the State of New York upheld The Salvation Army Southern Territory's lawsuit against The Bank of New York Mellon (BK) alleging, among other things, that the Bank grossly mismanaged its securities lending account. The mismanagement led to losses that would have been avoided had the bank followed The Salvation Army's highly conservative investment mandate emphasizing principal preservation and liquidity. The court rejected BNY's motion to dismiss The Salvation Army's complaint, upholding three of the most critical claims that the organization brought against the bank: gross negligence, breach of fiduciary duty and breach of contract.

"This is an important step for The Salvation Army in rectifying the mishandling of our funds," said Lt. Colonel David Mothershed, Chief Investment Officer for The Salvation Army Southern Territory. "For three years we have pushed for an amicable settlement with Bank of New York Mellon to resolve allegations outlined in the lawsuit without success, but the court's decision validates our efforts to remedy the bank's failure to follow our instructions to be fiscally conservative with all of our funds and investments."

In the lawsuit, The Salvation Army alleges that BNY assured the nonprofit that it would "invest and maintain the Army's funds in conservative assets with low risk and high liquidity." This was an agreed-upon strategy consistent with the Army's guiding principle of "safety first" to ensure protection and growth of funds. Despite its assurances, BNY purchased highly volatile securities for the organization's account, including "asset-backed securities derived from sub-prime and other low quality mortgages and home equity loans." Further, the bank failed to properly manage and protect the portfolio of The Salvation Army "as market conditions deteriorated."

The court's decision noted that if BNY "neglected to manage the account appropriately, and did not make use of the investment information it had, in good faith, on behalf of its client, it may have violated the contract's implied covenant." As a result, the court upheld The Salvation Army's claims against BNY for breach of fiduciary duty, breach of contract, and gross negligence.

Overall, The Salvation Army alleged that investments made by BNY on the Army's behalf left the Army's account holding "unproductive, toxic assets," and is seeking damages of approximately $22 million to support its vital charitable social service programs at this time. The many critical services the Army provides include food and clothing distribution, community development programs, and disaster relief. Each of these programs is dependent upon charitable donations, which account for virtually all of The Salvation Army's funding.

The Salvation Army Southern Territory previously stated, "The stewardship of the money entrusted to us is a responsibility that The Salvation Army has always taken very seriously, and we will not allow that trust to be broken. The Bank of New York Mellon breached our trust and we intend to pursue full recovery for its gross misconduct."

The Southern Territory, headquartered in Atlanta, is one of five separate Salvation Army corporate entities in the United States. The Southern Territory supports the Army's operations in 15 Southeastern states and the District of Columbia. The Southern Territory's action against BNY is not connected to the other four Army corporations.

About The Salvation Army
The Salvation Army, an evangelical part of the universal Christian church established in 1865, has been supporting those in need in His name without discrimination for more than 130 years in the United States. Nearly 30 million Americans receive assistance from The Salvation Army each year through the broadest array of social services that range from providing food for the hungry, relief for disaster victims, assistance for the disabled, outreach to the elderly and ill, clothing and shelter to the homeless and opportunities for underprivileged children. 82 cents of every dollar spent is used to support those services in 5,000 communities nationwide. For more information, go to www.salvationarmyusa.org or www.salvationarmysouth.org.

SOURCE The Salvation Army