Self-managed superannuation funds (SMSFs), mum and dad investors, Australian councils and financial advisers are some of the parties Perpetual Trustee Company (PTC) is fighting for in legal proceedings against BNY Mellon.
PTC has commenced legal action in the High Court of England and Wales against BNY Mellon's UK-based trustee services division over complex investments issued by Mahogany Capital, it was announced yesterday.
Grange Securities, an Australian subsidiary of the now bankrupt investment bank Lehman Brothers, sold over $125 million of Mahogany's so-called credit-linked notes to 1000 retail investors in Australia and other countries.
The cash raised from investors in these notes was used by Mahogany to purchase credit-linked notes from another party, Saphir Finance plc, which was the source of the funds for paying the interest and principal on Mahogany notes.
Saphir used the proceeds of the Saphir notes to purchase collateral to secure its obligations under a credit default swap agreement with another of Lehman Brothers' subsidiaries, Lehman Brothers Special Financing (LBSF), and under the relevant credit-linked notes sold to Mahogany.
BNY acts as the trustee for the Saphir note investors and holds security from Saphir over the collateral for the benefit of certain creditors, including the holder of the Saphir notes.
Lehman Brothers and LBSF filed for Chapter 11 bankruptcy in September and October, respectively.
PTC is the current holder of a series of notes issued by Saphir. PTC said in its claim that Mahogany investors are entitled to the proceeds of the collateral, ultimately backing Mahogany notes following LBSF's insolvency.
PTC has given directions to BNY to enforce the security held over the collateral and to apply all money it receives from the enforcement for the benefit of the Mahogany investors. None of these directions have been acted upon so far, prompting PTC to sue BNY.
The lack of action was due in part to pressure from the Lehman Brothers bankruptcy trustee.
PTC group executive Chris Green said he hoped BNY would comply with Perpetual's directions, which will allow the collateral to be sold and proceeds to be distributed back to investors. But he warned that investors may still be hit with losses.
