Första Ap-Fonden v Bank of New York Mellon SA/NV and Others

JurisdictionEngland & Wales
JudgeMr Justice Blair
Judgment Date16 October 2013
Neutral Citation[2013] EWHC 3127 (Comm)
Docket NumberCase No: 2010 Folio 1311
CourtQueen's Bench Division (Commercial Court)
Date16 October 2013

[2013] EWHC 3127 (Comm)




Royal Courts of Justice

Strand, London, WC2A 2LL


Mr Justice Blair

Case No: 2010 Folio 1311

Första Ap-Fonden
(1) Bank of New York Mellon SA/NV
(2) The Bank of New York Mellon (Formerly Known as the Bank of New York)
(3) Bny Mellon (Formerly Known as Mellon Bank NA)

Mr Ali Malek QC and Ms Catherine Gibaud (instructed by Bird & Bird) for the Claimant

Mr Mark Hapgood QC and Mr Jonathan Dawid (instructed by Clyde & Co) for the Defendants

Hearing dates: 10, 11, 12, 13, 17, 18, 19, 20, 24, 25, 26, and 27 June and 1, 2, 3, 8, 15 and 16 July 2013

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Blair Mr Justice Blair

This is a claim arising out of a form of financial activity called securities lending. The claimant, Första AP-fonden ("AP") is a Swedish pension fund, and brings these proceedings against the defendant, Bank of New York Mellon ("BNYM"), which managed its securities lending programme. It seeks to recover losses suffered in respect of a holding of medium term notes ("MTNs") issued by Sigma Finance Inc ("Sigma"). These notes were a type of fixed income security, and Sigma was one of a kind of financial company called "Structured Investment Vehicles", or "SIVs". They flourished prior to the crisis, but disappeared during its course, giving rise to litigation as to how their remaining assets were to be distributed. Sigma itself failed in September 2008 at the height of the financial crisis (see Re Sigma Finance Corp [2009] UKSC 2).


BNYM had acquired the Sigma notes for AP's account by way of investment of cash collateral for AP's securities which were loaned out. The claim is stated in various ways, but, in essence, AP contends that BNYM was at fault in acquiring and retaining the Sigma notes for its account, and in the way it dealt with AP after problems with Sigma's financial standing became apparent. The claimed loss on the notes is about US$35.5m, less about US$1.8m received from Sigma's receivers. In defence, BNYM contends that the Sigma notes were considered good investments at the time, that the complaints are made with the benefit of hindsight, and that the losses were the result of the crisis and not of any failings on its part.

The parties


As constituted following a 2001 reorganisation, Första AP-fonden is one of five "buffer funds" within the Swedish pension system, whose purpose is to contribute to deficits in pension distributions caused by temporary market fluctuations and demographic imbalances. The funds operate independently of each other. Första AP-fonden is called "AP1" for short, the others being AP2 and so on, but since it is the only relevant fund in this litigation, it is referred to simply as "AP".


AP is a relatively small organisation based in Stockholm, with about 65 employees at the time of the inception of its relationship with BNYM in 2004. The assets of the AP fund are public monies, paid as taxes and allocated to it from The National Social Insurance Authority of Sweden. On 1 January 2001, it had net assets of SEK134bn (approximately US$14bn) to manage. As at 30 June 2012, it had assets under management of SEK221bn (approximately US$31bn) in a global portfolio consisting of equities, fixed income securities and alternative investments that include real estate, private equity funds and hedge funds. Approximately 40% of the fund is externally managed.


The Bank of New York Mellon is a financial services provider, the particular services at issue here being those of global custodian, a term which describes an institution that holds securities for various types of fund. It was formed on 1 July 2007 from the merger of Mellon Bank ("Mellon") based in Pittsburgh, and the Bank of New York ("BoNY") based in New York, where the merged company is now headquartered. Prior to the merger, both Mellon and BoNY had large and active securities lending programmes. Following the merger, the two programmes were combined resulting in the largest securities lending operation in the world. I am told that it has over six hundred clients, US$3 trillion of lendable assets in custody, and up to US$700 billion on loan at any given time.


Prior to the merger, AP's relationship was with Mellon and, specifically, with ABN AMRO Mellon Global Securities Services B.V., which was a Netherlands-incorporated subsidiary of Mellon Bank. The relevant officers handling AP's account were based in London and Pittsburgh, and after the merger, some of the relevant officers were based in New York as well. The presence of the second and third defendants in the proceedings has to do with the assumption of liabilities on the merger, and it is unnecessary to say anything more about them.


To make sense of the evidence it is necessary to mention Standish Mellon ("Standish"), which was a subsidiary of BNYM that provided an asset management service. It was operationally separate from BNYM's securities lending division, with its own credit and portfolio management functions. Whilst BNYM stresses the independence of the entities, AP says that Standish and securities lending in effect joined forces on their Sigma exposure and shared information. This is demonstrated by the similar terms in which clients were written to in May 2008. AP submits that in practice they shared the same views about Sigma. I consider that the evidence does show considerable contact between them as regards Sigma as the crisis developed, particularly during 2008, and return to this subject below.

Narrative framework


The basic facts are uncomplicated, and the following is a narrative framework. In October 2004, after a tender process, AP entered into a Global Custody Agreement with BNYM followed by a Securities Lending Authorisation Agreement in December 2004.


Once the programme was in operation, BNYM provided daily reports to AP as to the securities held in its cash reinvestment portfolio. Holdings reports could be accessed on BNYM's online "Workbench" system. After the initial negotiations, there seems to have been relatively limited direct contact, with reviews every six months to discuss how the programme was doing. Matters appear to have operated smoothly, and AP's witnesses made it clear that it was satisfied with the service it received from BNYM.


Sigma was added to BNYM's approved list of issuers in August 2005. BNYM acquired Sigma securities for AP's account on five occasions, all of which went on to mature at par. Approval was not sought for these acquisitions, nor was there any need for AP's approval, since BNYM managed the collateral investments on a discretionary basis.


The disputed Sigma MTNs (the ones which eventually defaulted) were acquired by BNYM for AP's account as collateral in two tranches:

(1) US$5.5m acquired on 12 March 2007 and maturing 12 March 2009; and

(2) US$30m acquired on 26 or 30 April 2007 (the date of acquisition is in dispute) and maturing 30 October 2008.


Over time, there were some adjustments to the agreed terms. On 29 May 2007 AP increased the limit on lending across its portfolios to US$10bn (which meant up to about a third of its total assets was eligible for lending out).


It does not appear that the onset of the credit crunch in mid 2007 caused any particular difficulties in the relationship between the parties. However, as its internal documents show, BNYM became increasingly attentive to potential problems with its Sigma securities, to which it had a large overall exposure, particularly after the 2007 merger of the two banks.


Following a downgrade by the rating agencies, and a sharp reduction in the pricing of the securities, BNYM contacted its clients (or some of them) about Sigma. There were telephone calls between the parties on 16 May and 19 May 2008 which have been the subject of much dispute at trial, not so much as to what was said, but as to whether BNYM fairly represented the position.


Following the calls, AP tightened its investment criteria, but it continued to hold the Sigma MTNs, because, AP says, the bank had misrepresented the position to it. It was still holding them at the time of Sigma's default in October 2008. BNYM says, and I do not think that this is in dispute, that the Sigma MTNs were the only investment in AP's cash collateral portfolio to default. As a result, total losses on AP's cash collateral in the wake of the crisis were under 2% of the value of its portfolio. Even taking account of these losses, BNYM says, AP still saw a net profit from its securities lending activities with BNYM.

Outline of AP's claims and BNYM's defences


AP's claims can be summarised succinctly. First, BNYM should not have acquired the Sigma MTNs on its behalf. Second, having acquired them, it should not have held on to them when the market went into crisis. Third, the approach that BNYM finally made to AP in May 2008 about what to do with them was inadequate.


As set out in AP's opening submissions, its three main heads of claim are put as follows:

(1) Acquisition: AP's primary case is that the Sigma MTNs should never have been acquired for the portfolio, because AP was a conservative securities lending client. In particular, AP should never have had any exposure to investments that were (it is alleged) illiquid. BNYM responds that AP was not particularly conservative, the Sigma MTNs were liquid at the time of acquisition, and complied with the agreed investment guidelines, which were the only applicable criteria.

(2) Retention: AP's secondary case is that the retention of the Sigma MTNs in AP's account beyond August 2007, or, at latest January/February...

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