PBGC Seeks $25M in St. Vincent’s Pension Case

The Pension Benefit Guaranty Corporation has filed a brief in the U.S. Court of Appeals for the Second Circuit in Manhattan seeking $25 million in damages from Morgan Stanley Investment Management Inc. over investments made in mortgage-backed securities for New York's Saint Vincent Catholic Medical Centers' pension plan and its participants.

The appeal stems from a 2010 ruling by a U.S. District Court, which dismissed a lawsuit brought by St. Vincent's that raised the issue that Morgan Stanley knew the financial instruments were too risky, and that investing in them violated the pension plan's guidelines.

That ruling left PBGC responsible for paying benefits to Saint Vincent's 9,500 workers and retirees.

In its appeal PBGC argues that the district court erred by misreading the complaint and overlooking key facts. PBGC notes that the district court's order incorrectly asserts that Morgan Stanley invested only 9% to 12% of the pension plan's fixed-income portfolio in mortgage-backed securities, which the court ruled "was not excessive" and represented "appropriate diversification."

According to the appeal, Morgan Stanley "irresponsibly concentrated approximately 50% of the plan's fixed-income assets in the single asset class of mortgage-backed securities, even as MSIM became aware in 2007 and 2008 of the rapid and dramatic deterioration of the mortgage-backed securities market."

In addition, "between 9% and 12.6% of the overall fixed-income portfolio was invested in a subclass of mortgage-backed securities known as 'non-agency mortgage-backed securities'…a particularly risky subclass of mortgage-backed securities because the loans underlying these securities were not guaranteed by Fannie Mae or Freddie Mac."

PBGC contends that the "firm was aware those investments were risky and contrary to Saint Vincent's instructions."

PBGC wants the Second Circuit to reverse the ruling and require the district court to hear the case on its merits. If that happens, the agency will seek $25 million in damages from Morgan Stanley on behalf of Saint Vincent's pension plan and its participants.

PBGC filed its brief on May 26.