touryalai (detroit vs bny complaint)

8/4/2019 Touryalai (Detroit vs Bny Complaint)

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JS 44C/SDNYREV. 1/2008

** c/vIVIL COVE R S H EE T 63 4..he JS-44 civilcover sheet and the information contained herein neither replace nor supplement the filingand service ofpleadings orother papers as required bylaw, except as provided bylocal rules ofcourt. This form, approved bythe JudicialConference ofthe UnitedStates inSeptember 1974, is required for use ofthe Clerk ofCourt for the purpose ofinitiatingth e civil docke t sheet

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PLAINTIFFSTHE BOARD OF TRUSTEES OF AND ON BEHALF OF TH E GENERALRETIREMENT SYSTEM OF THE CITY OF DETROIT AN D THE BOARDOF TRUSTEES OF AN D ON B EH AL F O F TH E POLICE & FIRERETIREMENT SYSTEM OF T HE CI TY OF DETROIT, On Behalf

DEFENDANTSBNY MELLON, NA, an d THE BANK OF NEW YORK MELLON

ATTORNEYS (FIRMNAME,ADDRESS, ANDTELEPHONE NUMBER)Robbins Geller Rudman & Dowd, LLP58 So. Service Road, Suite 200, Melville, NY11747 (631) 367-7100

ATTORNEYS (IF KNOWN)

CAUSE OFACTION (CITE THE us. civil STATUTE under which you ar e filing AND write ABRIEF STATEMENT OF CAUSE)(DO NOT CITE JURISDICTIONAL STATUTES UNLESS DIVERSITY)Pursuant to Sect ions 10(b) an d 20(a) of the Exchange Act [15 U.S.C. Sect ions 78j(b) an d 78t (a)] an d Rule 1 0b -5promulgated the reunder by the United S t at e s S e c u ri ti e s an d Exchange Commission [17 C.F.R Sect ion 240.10b-5] .

Hasthisora similar case been previously filed inSDNY at anytime?No? \7\ Yes? r j Judge Previously AssignedIf yes, was this case Void Invol. CD Dismissed. No D Yes LZ1 If yes, give date & Cas e No .(PLACEAN [x] INONE BOX ONLY) NATURE OF SUIT

ACTIONSUNDER STATUTES

CONTRACT[ ]110 INSURANCE[ ]120 MARINE[ ]130 MILLER ACT[ ]140 NEGOTIABLE

INSTRUMENT11150 RECOVERY OFOVERPAYMENT &ENFORCEMENTOF JUDGMENT

[ 3151 MEDICARE AC T[ ]152 RECOVERY OFDEFAULTEDSTUDENT LOANS(EXCLVETERANS)

[J 153 RECOVERY OFOVERPAYMENTOF VETERAN'SBENEFITS[ 1160 STOCKHOLDERSSUITS

KJ190 OTHERCONTRACT

[ ]195 CONTRACTPRODUCTLIABILITY

[ ]196 FRANCHISE

REAL PROPERTY[ )210 LAND

CONDEMNATION[ J220 FORECLOSURE[ )230 RENT LEASE &EJECTMENT[ ]240 TORTS TO LAND[ ]245 TORT PRODUCTLIABILITY

[ ]290 ALL OTHERREAL PROPERTY

PERSONAL INJURYERSONAL INJURY[ ]310 AIRPLANE[ ]315 AIRPLANE PRODUCT

LIABILITY[ ] 320 ASSAULT, LIBEL&SLANDER[ ] 330 FEDERALEMPLOYERS'LIABILITY

[ ) 340 MARINE[ ) 345 MARINE PRODUCTLIABILITY[ ] 350 MOTOR VEHICLE[ ] 355 MOTOR VEHICLEPRODUCT LIABILITY[ J 360 OTHER PERSONALINJURY

FORFEITURE/PENALTY BANKRUPTCY[ J 422 APPEAL

28 US C 15 8[ ]423 WITHDRAWAL28 US C 15 7

OTHER STATUTES

ACTIONS UNDER STATUTESCIVIL RIGHTS[ ]441 VOTING[ J442 EMPLOYMENT[ ] 443 HOUSING/

ACCOMMODATIONS[ ]444 WELFARE[ ]445 AMERICANSWITHDISABILITIES -EMPLOYMENT

[ ]446 AMERICANSWITHDISABILITIES -OTHER[ ) 440 OTHER CIVIL RIGHTS

C heck if demanded in complaint:CHECK IF THIS IS A CLASS ACTION

t- 3 UNDER FRCP . 23DEMAND $ OTHERCheck YESonlyif demanded in complaintJURY DEMAND: 0 YES NO

[ ]362[ ]365[]368

PERSONAL INJURY -MED MALPRACTICEPERSONAL INJURYPRODUCT LIABILITYASBESTOS PERSONALINJURY PRODUCTLIABILITY

[ 1610[ ]620[ ]625

[ ]400[ ]410[ J 430[ ]450[ ] 460[ ]470

PERSONAL PROPERTY[ ]630[ J 640( ]650[ )660[ J690

AGRICULTUREOTHER FOOD &DRUGDRUG RELATEDSEIZURE OFPROPERTY21 US C 88 1LIQUOR LAWSRR & TRUCKAIRLINE REGSOCCUPATIONALSAFETY/HEALTHOTHER

PROPERTY RIGHTS[ ] 82 0 COPYRIGHTS[ ]830 PATENT[ ) 84 0 TRADEMARK

STATEREAPPORTIONMENTANTITRUSTBANKS & BANKINGCOMMERCEDEPORTATIONRACKETEER INFLUENCED & CORRUPTORGANIZATION AC T(RICO)CONSUMER CREDITCABLE/SATELLITE TVSELECTIVE SERVICESECURITIES/COMMODITIES/EXCHANGECUSTOMERCHALLENGE12 US C 3410OTHER STATUTORYACTIONSAGRICULTURALACTSECONOMICSTABILIZATION ACTENVIRONMENTALMATTERSENERGYALLOCATION AC TFREEDOM OFINFORMATION ACTAPPEAL OF FE EDETERMINATIONUNDER EQUALACCESS TO JUST ICECONSTITUTIONALITYOF STATE STATUTES

[ J 3701)371[ ]380[ ]385

OTHER FRAUDTRUTH IN LENDINGOTHER PERSONALPROPERTY DAMAGEPROPERTY DAMAGEPRODUCT LIABILITY LABOR

[ J 710[ J 720[ ]730

SOC IAL SECURITY

[ ]861 HIA(1395ff )[ )862 BLACKLUNG(923)[ )863 DIWC/DIWW (405(g) )[ J 8 64 S SID TITLE XVI[ ) 86 5 RSI (405(g))

[ ]480[ I 490[ [810[ ]850

PRISONER PETITIONS[ ]740[ J 790

FAIR LABORSTANDARDS ACTLABOR/MGMTRELATIONSLABOR/MGMTREPORTING &DISCLOSURE AC TRAILWAY LABOR ACTOTHER LABORLITIGATIONEMPL RE T IN CSECURITYACT

FEDERAL TA X SU ITS

[ I 870 TAXES (U.S. Plainti fforDefendant)[ J871 IRS-THIRD PARTY26 US C 7609

[ I 875

[ ) 890[1891[ ]892[ ]893[ I 894[ ]895[ J900

[ ]950

[1510

[ 1530[ ]535[ ]540[ ]550[ I 555

MOTIONS TOVACATE SENTENCE20 US C 2255HABEAS CORPUSDEATH PENALTYMANDAMUS & OTHERCIVIL RIGHTSPRISON CONDITION

[ 1791

IMMIGRATION

[ ]462[ H63[1465

NATURALIZATIONAPPLICATIONHABEAS CORPUS-ALIEN DETAINEEOTHER IMMIGRATIONACTIONS

DO YOU CLAIM THIS CASE IS RELATED TO A CIVIL CASE NOW PENDING IN S.D.N.Y.?IF SO , STATE:JUDGE f o cWJ H, gxrm#r> DOCKET NUMBER (H


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(PLACEAN x INONEBOX ONLY)L^J 1 Original

ProceedingI i 2a. Removed from

Sta t e Cou r t| | 2b .Removed from

Sta t e Cou r t AN Da t l ea st o n eparty is pr o se .

I I 3 Remanded fromAppellate Court

ORIGINI I 4 Reinstated or

Reopened| | 5 Transferred from I i 6 Multidistrict

(Specify District) LitigationI I 7 Appeal to District

Judge fromMagistrate JudgeJudgment

(PLACEAN x INONEBOX ONLY) BASIS OF JURISDICTION 1 U.S. PLAINTIFF 2 U.S. DEFENDANT 0 3 FEDERAL QUESTION 4 DIVERSITY(U.S. NOT A PARTY)

IF DIVERSITY, INDICATECITIZENSHIP BELOW.(28 USC 1322, 1441)

CITIZENSHIP OF PRINCIPAL PARTIES (FOR DIVERSITY CASES ONLY)(Place an [X] in one box for Plaintiffand one box for Defendant)

CITIZEN OF THIS STATEPTF DEF[ 11 [11

CITIZEN OF ANOTHER STATE [)2 []2

CITIZEN OR SUBJECT OF AFOREIGN COUNTRY

INCORPORATED o r PR INCI PA L PLACEOF BUS INESS IN THIS STATE

PLAINTIFF(S)ADDRESS(ES) ANDCOUNTY(IES)T he C ole man A. Young Munic ipa l Cen t e r ,Two Woodwa r d Av e n u eDe t r o i t , Michigan 48226(Wayne County)

DEFENDANT(S)ADDRESS(ES) ANDCOUNTY(IES)The Bank of New Yo r k Me l l o nOne Wa l l Street,New Yo r k , NY 10286(New York County)

PTF DEF PTF DE F[]3[]3 INCORPORATED and PRINCIPAL PLACE [ ] 5 [ ]5

O F BU S IN E S S IN ANOTHER STATE

[ 14 [ 14 FOREIGN NATION

BNY Mel l o n , NA1 M e l l o n Ba n k Center500 Gran t Street, 47 t h F l o o rP i t t s b u r g h , PA 15258 -0001(Al legheny County)

[ 16 [)6

DEFENDANT(S) ADDRESS UNKNOWNREPRESENTATION IS HEREBY MADETHAT, AT THIS TIME, 1HAVE BEEN UNABLE, WITH REASONABLE DILIGENCE, TO ASCERTAIN THERESIDENCE ADDRESSES OF THE FOLLOWING DEFENDANTS:

Checkone: THIS ACTION SHOULD BE ASSIGNED TO: WHITE PLAINS [7] MANHATTAN(DO NOT check either box if thi s a PRISONER PETITION.)

DATE 09/12/11 SIGNATURE OF ATTORNEY OF RECORD

RECEIPT #

Magistrate Judge iMagistrate Judge _

e designated by th e Clerk of th e Court.

ADMITTED TO PRACTICE IN THIS DISTRICT[ ] NOPC] YES (DATE ADMITTED Mo.Attorney Bar Code # SR7957

05

is so Designated.

Yr 1995 }

J. Michael McMahon, Clerk of Court by Deputy Clerk, DATEDUNITEDSTATES DISTRICT COURT (NEW YORK SOUTHERN)


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UN ITED STATES D ISTRICT COURTSOUTHERN D ISTRICT OF N EW YORK

THE BOARD OF TRUSTEE S OF AND ONBEHALF OF THE GENERAL RETIREMENTSYSTEM OF THE C IT Y O F DETROIT ANDTHE BOARD OF TRUSTEES OF AND ONBEHALF OF THE POLICE & FIRERETIREMENT SYSTEM OF THE C IT Y O FDETROIT, On Behalf of Themselves and AllOthers Similarly Situated,

Plaintiffs,vs.

BNY MELLON, N.A. AND THE BANK OFNEW YORK MELLON,

Defendants.

11 CIV 6345CLASS ACT ION

D EM AN D F OR JURY T R I A L

i o

C L A SS A C TIO N COMP LA IN T

TheBoardofTrustees (the "Detroit General Board") on behalfof and as a representativeofthe General Retirement System of the City ofDetroit (the "Detroit General Plan" or the "DetroitGeneral Plaintiff) and the Board of Trustees (the "Police & Fire Board") on behalf of and as arepresentative of the Police & Fire Retirement System of the City of Detroit (the "Police & FirePlan" orthe"Police &Fire Plaintiff) (collectively "Plaintiffs" orthe"Plans"),1 and a class of allother similarlysituated trustees, administrators, and other fiduciaries ("Class Members") of other

The Plans are the real party in interest to this action, and operate through their respectiveBoards of Trustees, advisors, investment managers, and investment consultants. The Boards ofTrustees are thus, only nominal plaintiffs in this action.


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other similarly situated trustees, administrators, and other fiduciaries ("Class Members") ofothersimilarly situated retirement plans ("Class Plans") (the Plans and the Class Plans may collectivelybereferred toasthe"Plans"), bring this class action against BNY Mellon, N. A., formerly known asMellon Bank, N.A. ("BNY Mellon, N.A."), and The Bank ofNew YorkMellon, formerly known asThe Bank of New York (hereinafter collectively "BNY Mellon" or "Defendant"), and state asfollows:

I. SUMMARY OF THE ACT ION1. Defendant is a sophisticated financial institution that represents itselfas the "global

leader in the securities lending industry." As part of its Securities Lending Program ("SLP"),Defendant, who also served asthePlaintiffs' custodian, promised toact asPlaintiffs' agent to investsecurities loaned byPlaintiffs to approved borrowers inreturn for collateral that itwould prudentlymanage and invest while ensuring the safety ofprincipal above all other considerations and as ameans to earn incremental income to offset custodial fees associated with maintaining its trustfunds.

2. Plaintiffs separately entered into a Securities Lending Agreement and Guaranty(collectively, the "Agreement") with Defendant, a sophisticated financial institution. Under theAgreement, Defendant had///discretion to loan Plaintiffs' securities to borrowers in return forcash and non-cash collateral (the "Collateral"). Defendant also had/w// discretion to invest theCollateral. While Plaintiffs kept abreast oftheperformance oftheSLP through presentationsmadeby Defendant, Plaintiffs relied on Defendant to make prudent investment decisions as required bythe Agreement and the incorporated Schedule I, which provided investment guidelines (the"Guidelines") selected and executed bytheparties. Theclear investment objective under each wasto earn a minimal return to ensure safetyof principal over all other considerations. Under theAgreement with the Plans, Defendant was paid 20% of any profit earned from the Collateral

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investments but had no liability if the investments lost money, except due to its own negligence,bad faith, or willful misconduct.

3. As Plaintiffs' investment manager, Defendant made various investments withPlaintiffs' Collateral both through SeparatelyManaged Collateral Accounts as well as in the BNYInstitutional Cash Reserves Fund (a "Commingled Account" or the "ICR"). In particular, BNYMellon invested theCollateral of the Detroit General Plan in Lehman Brothers Holdings, Inc.("Lehman") floating rate notes (CUSIP Numbers 52517PL33 and 52517P153) purchased onAugust28,2006 and December 21,2006, respectively (the "Lehman Notes").2 The Police&Fire Plan onlyheld CUSIP 52517PL33. Plaintiffs also participated in the ICR.

4. Beginning in 2007 and continuing into 2008, it became increasingly apparent, orshould have to Defendant, that there was tremendous uncertainty surrounding Lehman's financialstability. By February of2008, Defendant's concern about Lehman's financial uncertainty was sogreat that Defendant, who was also one of a handful of clearing banks for Lehman, requiredadditional collateral from Lehman as a required condition to allow Lehman to continue itsoperations with Defendant. Additionally, in the summer and fall of 2008, executives withinDefendant's SLP attempted to minimize BNY Mellon's exposure in securities lending loans toLehman, which Defendant would ultimately beheld liable for should Lehman collapse.

5. Despite Defendant's concerns regarding Lehman's stability and its own actions tominimize its exposure to aLehman default, Defendant surprisingly took no action with respect tothe Collateral investments itmade on behalfofPlaintiffs and the Class. Although Defendant couldhave divested orotherwise hedged against losses on the Lehman Notes and other similar Lehman2 The Lehman Notes had maturity dates of November 24, 2008 and December 23, 2008,respectively.

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investments at any point during 2007 through 2008 and significantlyminimized or eliminated anylosses, Defendant held onto the Lehman investments. In such away, Defendant took agamble withPlaintiffs' and the Class Plans' money for which it bore no risk of loss. Defendant made thisgamble because under the Agreement, Defendant had no risk of loss but was paid 20% of anyprofit. Because of this "heads Iwin, tails you lose" paradigm, Defendant had no incentive tomodify itsunauthorized and risky investment strategy, and made no attempt to do so, because itwasthebeneficiaryofall profits, andwould not be responsible for any losses. Moreover, Defendant putits profitable relationship with Lehman ahead of its obligation to fulfill its fiduciary duties to thePlaintiffs and Class Plans.

6. Defendant lost its gamblewhen Lehman declared bankruptcy on September 15,2008,and Plaintiffs and the Class Plans suffered more than a billion dollars in losses. Defendant'sgamble ofholding on to the Lehman investments violated the Agreement, the Guidelines, and itsfiduciary duties. In particular,Defendant violated the Guidelines and common law by: (1) failing toadhere to the key objective of safety ofprincipal and corpus being paramount over all otherconsiderations; (2) failing to diversify the Collateral investments; (3) imprudently maintaining theinvestments in Lehman despite growing uncertainty over Lehman's financial stability; and (4)acting in its own self-interest by failing to modify its risky investment strategy because of itsprofitable Lehman relationship because it was the beneficiary of all the profits but none of thelosses.

7. This action seeks to recover losses caused byDefendant's breaches ofits fiduciaryduty to the Plaintiffs and the Class Plans. Defendant'smisconduct caused the Plans and the ClassPlans to lose both principal and profits that would havebeen earned but for Defendant'smisconductand resulted insubstantial losses. Defendant's acts and omissions, as herein described, are breaches

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of: (1) contract; (2) the implied covenants ofgood faith and fair dealing; (3) Defendant's fiduciaryduty under state law; and (4) amount to promissory estoppel.

8. Count I alleges breach of contract by Defendant. By engaging in the conductdescribed herein, Defendant failed to perform its duties under the Agreement and breached theAgreement's terms. In doing so, Defendant also breached the implied term of the Agreement thatrequired it to monitor and prudently manage the Plans' and Class Plans' Collateral investments andtheir performance. As adirect and proximate result ofDefendant's breach of the material terms ofthe Agreement, the Plans and Class Plans did not receive the benefit oftheir bargain, were damagedas a result, andare threatened withadditional harm.

9. Count II alleges that Defendant breached implied covenants ofgood faith and fairdealing, imposed upon each party to acontract. The Agreements at issue between the Plans andClass Plans on the one hand, and Defendant on the other hand, were abinding contract containingimplied covenants of good faith and fair dealing. Defendant breached these implied covenants tothe detriment of Plaintiffs and other Class Members by the conduct described herein, thereby:failing to make good faith efforts to place, invest,monitor and maintain the Plans' and Class Plans'Collateral prudently, failing to disclose that the Plans' and Class Plans' investments wereimproperlymaintained; and failing to prudently invest and monitor such Collateral investments sothat they would maintain principal value.

10. Count III alleges claims for promissory estoppel. Defendant made representationsregarding the SLP, that they would invest the Plans' and Class Plans' Collateral in relatively stable,secure and non-risky cash equivalent investments geared at gaining small profits and preservingprincipal value, so as to induce the Plans and other Class Members to rely on these representationsto take actions andmake their payments based on these representations. Plaintiffs relied upon these


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representations made by Defendant and its agents and representatives, and reasonably so, to theirserious detriment.

11. Count IV alleges claims for state law breaches offiduciary duty. Defendant, asfiduciary for the Plans and Class Plans, and in position ofcontrol and oversight ofsecurities lendingaccounts andCollateral, owed to Plaintiffs the duties tomaintain theCollateral assets and to investthose assts loyally, faithfully, carefully, diligently and prudently in relatively stable, secure and low-risk securities. Instead, Defendant failed to exercise due care in monitoring and maintain theCollateral investments. Defendant thereby breached its duties ofcare, loyalty, accountability anddisclosure by failing to act as ordinary prudent persons would have acted in a like position, to thegreat detriment ofthePlaintiffs.II. PARTIES

A. Plainti f f12. The Retirement Systems of the City ofDetroit are comprised of two (2) separate

systems: 1) the Detroit General Retirement System and 2) the Police and Fire Retirement System.Each system is governed by aBoard ofTrustees, and both are located at The Coleman A. YoungMunicipal Center, Two Woodward Avenue in Detroit, Michigan 48226.

13. TheDetroit General Planwas established on October 14,1937, and exists to pay thebenefits that itsmembers have earned. The assets oftheDetroit General Plan provide the means topay these benefits. As of June 30, 2010, there were 8,330 active members and 11,480 membersreceiving benefits.

14. The Police&Fire Plan was established on July 1,1941, and exists to pay the benefitsthat its members have earned. As of June 30, 2010, the Police &Fire Plan had 4,045 activemembers and 8,560 members receiving benefits.

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15. The Boards ofTrustees are comprised oftrustees, citizens ofthe State ofMichigan, ofthe Plaintiffs, as authorized by Article 11, Section 11 -103 ofthe January 1,1997 CharteroftheCityof Detroit as amended.

B. Defendant16. Until their merger in 2007, Mellon Financial Corporation ("Mellon Corp.") and The

Bank ofNew York Company, Inc. ("BNY") were the respective holding companies for MellonBank, N.A., anationally chartered bank, andThe Bank ofNew York, astate-chartered bank underthe laws of New York. Through their respective banks, Mellon Corp. and BNY operatedindependent securities lending programs servicing hundreds of clients. Then, on July 7, 2007, theholding companies merged to form The Bank ofNew York Mellon Corporation ("BNY MellonCorp."), with their respective operations consolidated thereunder. MellonBank, N.A. later changedits name to BNY Mellon, N.A., and The Bank ofNew York became The Bank of New YorkMellon, both herein named as Defendant.3 At all relevant times, collectively and/or individually,the foregoing banks had authority and control over the investment ofthe Plans' Collateral and theliquidation thereof.

17. Headquartered in New York, BNY Mellon is a leading asset management andsecurities services company, providing investmentmanagement, asset and fund administration, andfiduciary and banking solutions for corporations, institutions and affluent individuals worldwide.BNYMellon, through its Asset Servicing division, managed the Plans' cash investments that are atissue in this case. BNY Mellon has offices in 27U.S. states, aswell as international offices inEurope, South America, the Middle East and Africa, and the Asia-Pacific region, among other

This process of consolidation was completed on or about July 1, 2008.


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international locations, serving more than 100 markets worldwide. As ofMarch 31, 2009, BNYMellon has $19.5 trillion in assets under custody or administration and $881 billion undermanagement.4III . JUR ISD IC T ION AND VENUE

18. Plaintiffs seek relieffor themselves, the Plans and other similarly situated plans underthe laws of the State of New York. This Court has jurisdiction over this action and Defendantpursuant to 28 U.S.C. 1332. The amount in controversy is in excess of $5,000,000 (exclusive ofinterest and costs), and this is a class action in which at least onemember of the Class is a cit izen ofa state different from any Defendant. One or more Defendant may be found in this District,Defendant transacts business within the State, and Defendant has committed tortuous acts withinthe State and/or has committed tortuous acts outside the State that has caused injury to persons andproperty within the State, including the Plaintiffs and other Class Members. Defendant alsomaintains executive offices within the State of New York, Defendant systematically andcontinuously has done and continues to do business in this District, and this case arises at least inpart out ofDefendant's acts and conduct within this District.

19. Venue is proper in this Court under 28 U.S.C. 1391 because Defendant maintainsheadquarters in this District and engaged therein in acts ofwrongdoing. Venue is also proper in thisDistrict because Plaintiffs consented to venue in New York pursuant to the Securities LendingAgreements and Guarantees dated June 26, 2003 (Police & Fire Plan) and June 30, 3005 (DetroitGeneral Plan).

The Bank ofNewYorkMellon, AboutUs, At a Glance, http://www.bnymellon.com/about/ataglance.html (last visited June 1, 2009).-8-


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IV . FACTUAL ALLEGAT IONS

A. The Securities Lending Relationship1. BNY Mellon Served as Custodian For the Plans ' Assets

20. The Police & Fire Plan and the Detroit General Plan appointed The Bank ofNewYork as Custodian on June 26, 2003 and June 30, 2005, respectively, to assist in the dailyadministration of the Plans' accounts. For this service Defendant charged the Plans a custodial fee,whichwasultimatelyborneby thePlaintiffs' participantsanddiminished the rate of returnactuallyachieved by the Plaintiffs' investments.

2. Defendant Encourages Plaintiffs to Participate in its SecuritiesLending Program to Offset Custodial Fees

21. Upon information and belief, as a method for offsetting the unavoidable and costlycustodial fees, Defendant encouraged Plaintiffs to join its SLP. BNY Mellon began its SLP in1977,5 and asof June 2006, BNY Mellon's SLP hadmore than $1 trillion in lendable securities.Securities lending refers to the lending of securities by one party to another. The terms of the loanare governed by a "Securities Lending Agreement," which requires that the borrower provide thelender with collateral in the form of cash, government securities and/or a letter of credit of valueequal to or greater than the loaned securities ("Collateral"). The primary reason for borrowingsecurities is market making, hedging, and arbitrage trading purposes.

22. As an intermediarybetween the lender and the borrower, and as an agent on behalfofthelender,BNYMelloninvests the collateralprovidedby theborrower in accordancewithspecificinvestment guidelines agreed upon between BNYMellon and the lender that require BNY Mellon

5 The Bank of New York Mellon, Securities Lending, http://www.mellon.com/securitieslending/index, html (last visited May 13, 2009).


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to invest the collateral in investments which provide a "steady return while focusing upon thepreservation of principal, interest rate sensitivity andcreditrisk."

23. BNYMellon represents that it delivers value to its clients through "a disciplinedprocess ofgenerating returns andmanaging risk, while focusing onmaximizing client flexibility."According toBNYMellon, its securities lending program addsvalueto aportfolio whileoperating

owithin strict risk parameters and fiduciary responsibilities by: Lending to only the most credit worthy borrowers at equal or betterthan prevailing market rates; Maintaining minimum collateral levels through a daily mark-to-

market process; Conservative investmentof cash collateral with goals of optimizingreturns while preservingprincipal; Equitable,systemicallocationof lendingopportunities, regardlessof

portfolio size.24. Despite the potential risks involved in securities lending, including borrower

bankruptcy, collateral deficiencies (i.e., the value of collateral investments depreciates), andchallengeswithsettlements, corporate actions, ordividends andinterest, BNY Mellon neverthelessextolled that a main objective of its program is "the preservation ofprincipal by maintaining aprudent level of liquidity, implementing policies and procedures to monitor and control our

6 The Bank of New York Mellon, Securities Lending, http://www.mellon.com/securitieslending/index.html (last visited May 13, 2009).7 The Bank of New York Mellon, Securities Lending, http://www.mellon.com/securitieslending/ index.html (last visited May 13, 2009).8 Unless otherwise noted, all emphasis is added.9 The Bank of New York Mellon, Securities Lending, http://www.mellon.com/securitieslending/about.html (last visited May 13, 2009).

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investment guidelines, monitoring thequality of our issuers, andperforming regularly scheduledtests to identify the interest rate sensitivity of our investment portfolio."

25. The SLP inves tments were also to be made in accordance with Rule 2a-7 of theInvestment Company Act of 1940, which provides requirements regarding the credit quality,diversification and maturity guidelines for investments in money market funds. Money marketfunds are designed to limit investors' exposure to credit, market, and liquidityrisks. To that end,the securities comprising moneymarket funds must be highly liquid and of the highest quality.Rule2a-7carefullyprescribesthe overall composition ofmoneymarketfunds' portfolios. Maturityguidelines are outlined for individual securities as well as the portfolio as a whole. Eligiblesecurities are defined and classified by tiers according to credit quality, maturity, and ratings. Avarietyof diversification requirements arebasedon securitytype, security classification andissuer.Moreover, funds must perform an independent credit analysis for every security purchased ~reliance on credit ratings agencies, alone, is insufficient.

26. In encouraging Plaintiffs toparticipate in its SLP,upon information andbelief,BNYMellon marketed and touted to the Boards ofTrustees that its SLP was "the global leader in thesecurities lending industry," had "#1 rankings," a long history without client losses, and that theprogram hadminimalrisk, offeredpositivemonthlyincome,and aprudent short-term investmentposture.

27. Given the purported low-risk of the SLP, Defendant's 30 years of SLP experiencewithout losses, and the Plans' ability to offset custodial fees, the Plans agreed to enroll in theprogram.

10 The Bank of New York Mellon, Securities Lending, http://www.mellon.com/securitieslending/index.html (last visited May 13, 2009).

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3. Plaintiffs' and the Class Plans' Securities Lending Agreementsand Gua ran ti es

28. The Pol ice & Fire Plan and Detroi t General Plan entered into the Agreement on orabout June 26, 2003 and June 30, 2005, respectively.11 The Agreement governs BNY Mellon'sstandardized securities lending program. Uponinformation andbelief,theAgreement executed byand between Plaintiffs and Defendant is materially similar to the Agreement executed by andbetween Defendant and the members of the Class on behalf of the Class Plans.

29. Underthe termsof theAgreement, Defendantwas appointed asPlaintiffs' "agent tolend securities in the Account to Borrowers from time to time." As agent for the Plans, Defendanthad full discretion to lend securities owned bythePlans to approved "credit-worthy" borrowerspursuant to a securities borrowing agreement. These borrowers typically needed the securities fortheir own short-term market-making or arbitrage purposes.

30. In orderto protect thePlans' securities from a borrower's default, the Agreementrequired borrowers to post collateral as security for the return ofthe loaned securities. Under theAgreement, borrowers were required to post collateral that, at all times, had amarket value ofnotless than 102% of the then current market value of the loaned securities as of the close of thepreceding business day (the "Collateral Requirement"). If the market value of the Collateralreceived from the borrower fell below the 102%Collateral Requirement, the AgreementrequiredBNY Mellon to demand additional Collateral from the borrower in order to assure the market valueof the collateral was never less than the Collateral Requirement. Under the Agreement, BNY

1x Atrueandcorrect copyofthe complete Agreement, including Guidelines, is attached heretoas Composite Exhibit A.

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Mellon would be responsible for replacing any loaned securities that were not returned by aborrower (e.g., in the event ofaborrower's default). Exhibit A, Article V.

31. Pursuant totheCollateral Requirement, borrowers provided theCollateral to BNYMellon, as agent for the Plans, as security for the return of the loaned securities. Defendant, asagent for the Plans, held theCollateral in approved collateral accounts (the "Collateral Account").ThePlans eachheldan interest in theCollateral Account basedon theiroutstanding loanbalances.Exhibit A, Article IV 2(a).

32. As part of the SLP, Defendant then invested the Collateral inits full discretion as ameans ofearning amodest return that would offset the cost ofthe custodial fees otherwise beingcharged to Plaintiffs andtheClassPlans.

33. BNYMellon was to invest Plaintiffs' Collateral only in Approved Investments asdefined by the Agreement.

34. The Agreement defined "Approved Investment" as "any type ofsecurity, instrument,participation or interest in property inwhich Cash Collateral may be invested or reinvested, as setforth on Schedule I [t]hereto (which may be amended from time to time by execution ofa revisedScheduleI)." Exhibit A, Article 1(3).

35. The Agreement provided that BNY Mellon was "authorized and directed, withoutobtaining any further approval from [Plaintiffs], to invest and reinvest all or substantially all oftheCash Collateral received in any Approved Investment." Exhibit A, Article IV.2(a). The sameparagraph expressly stated that Defendant reserved the right, "in its sole discretion, to liquidate anyApproved Investment and credit the net proceeds to the Collateral Account." Id.

36. Additionally, Article IV.2(d) provided that the Plaintiffs' collateral and ApprovedInvestments "shall be controlled by, and subject only to the instruction of, [BNY Mellon], and

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[BNY Mellon] shall not be required to comply with any instruction of[Plaintiffs] with respect toth e same."

37. Itwas theBoards' understanding that based ontheAgreement, theTrustees had noauthority over Approved Investments purchased for the Plans' Collateral Account.

38. Under the Agreement, BNY Mellon would not share in any losses resulting fromCollateral investments. Rather, the Agreement states that "[a]ll Approved Investments shall beforthe account and risk ofLender [the Plans]." See ExhibitA.2(c). "To the extent any loss arising outofApproved Investments results in adeficiency in the amount ofCollateral available for return to aBorrower, the Lender agrees to pay cash in an amount equal to such deficiency." See Exhibit A,Article IV.2(c).

39. Although BNYMellon does not share in any Collateral investment losses, under theterms ofthe Agreement, BNY Mellon collects a fee, "accrued daily, equal to amutually agreedpercentage of the sum of all interest, dividends and other distributions earned from ApprovedInvestments and Securities Loan Fees paid orpayable by the relevant Borrowers, net ofRebatespaid by Bank to relevant Borrowers and brokerage commissions incurred in making ApprovedInvestments." See Exhibit A, Article V(8). In other words, BNY Mellon receives 20% of theprofits from Collateral investments even though it bears none ofthe risk ofloss.

40. Significantly, however, the Standard ofCare section oftheAgreement provides that,"Bank shall not beliable for any costs, expenses, damages, liabilities orclaims (including attorneys'and accountants' fees) incurred by Lender, except those costs, expenses, damages, liabilities orclaims arising out ofthe negligence, badfaith or willfulmisconduct ofBank:' See Exhibit A,Article V. 1(a).

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4. The Securities Lending Guidelines41. Pursuant to the Agreement, BNYMellon hadfull discretion to invest theCollateral in

any Approved Investment, as described in the Guidelines attached to the Agreement, whichprescribed how Defendant was to invest the Collateral.12 Upon information and belief, theGuidelines executed by and between Plaintiffs and Defendant are materially similar to thoseexecuted by and between Defendant and members ofthe Class on behalf of the Class Plans.

42. Defendant was the sole investment fiduciary responsible for investment of theCollateral andthePlans' assets in theCollateral Account andhadcomplete authority andcontroloverthemanagement anddisposition of theCollateral.

43. The Guidelines also provided several specific investment rules. Among others, theyauthorized Defendant to invest and reinvest Cash Collateral in the following investments:

securities issued or fully guaranteed bytheUnited States government andanyagency, instrumentality or establishment of the United States government("Government Securities") obligations issued bythe central government ofany OECD country and anyof theiragencies or instrumentalities (currency hedged) commercial paper, notes, bonds and other debt obligations (includingpromissory notes, funding agreements and guaranteed investment contracts),whether or not registered under the Securities Act of 1933, as amended.Such obligations mayhave fixed, floating, or variable rate interest paymentprovisions. Such obligations will be rated not less than A-l (S&P) orP-l(Moody's) ifmaturity does not exceed one year, and not less thanA(S&P) orA2 (Moody's) ifmaturity exceeds one year asset-backed securities rated A-l (S&P) or P-l (Moody's) if maturity doesnotexceed one year, and not less than AAA (S&P) ifmaturity exceeds one

yea r

12 A true and correct copy oftheGuidelines is attached to theAgreement atExhibit A.

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certificates of deposit, time deposits and other obligations ofU.S. banks(including The Bank ofNew York) or issued in the U.S. by branches andsubsidiaries of foreign banks rated not less that [sic] B/C (BankWatch) orA(S&P)

repurchase and reverse repurchase agreements involving ApprovedInvestments authorized herein with counterparties including The BankofNew York and Borrowers

securities, units, shares and other participations inmoney market funds, shortterm investment funds, pools ortrusts (including those managed byThe BankofNew York)

44. Upon information and belief, inaddition to vesting Defendant with full investmentdiscretion, the Agreement and Guidelines required that BNYMellon discharge itsmanagement in aprudentmanner, always keeping the best interest ofthe participants clearly inmind and ensurethe absolute safety ofprincipal.

5. Defendant's Fiduciary Duties45. BNY Mellon isa fiduciary for Plaintiffs and each member oftheclass because itwas

under aduty to act for the benefit ofPlaintiffs and each member ofthe class onmatters within thescope of its relationship.

46. BNY Mellon is a fiduciary in that it exercised authority or control over themanagement or disposition ofthe assets ofthe Plans, the Collateral, and, upon information andbelief, the assets of the Class Plans.

47. Defendant is also a fiduciary inits capacity as an investment manager ofPlaintiffs'and the Class Plans' assets under the SLP.

48. As a fiduciary for Plaintiffs and each member of the class, BNY Mellon owed theduties ofgood faith, loyalty, and avoidance ofself-dealing. BNYMellonwas required to dischargeits obligations with respect to the Class Members solely in the interest ofthe Class Members whilesubordinating its own interests to those of the Class Members, for the exclusive purpose of

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providingbenefits to the ClassMembers, and with the care, skill, prudence, and diligence under thecircumstances then prevailing that aprudent person acting in alike capacity and familiar with suchmatters would use in the conduct of a similar enterprise with similar aims.

49. Defendant managed, acquired, and disposed ofthe Plans' assets inits administrationof Plaintiffs' securities lending portfolio. Additionally, BNY Mellon qualifies as a bankinginstitution organized under the laws of the United States in accordance with the InvestmentAdvisers Act of 1940.13

50. Defendant has a duty to act prudently by employing proper methods to investigate,evaluate andstructure investments madewithPlaintiffs' andtheClass Plans'Collateral. Defendantis also required to act in amanner as would others who have a capacity and familiarity with suchmatters. In addition, Defendant was required to exercise independent judgment when makinginvestment decisions. Blanket reliance upon the ratings issued byratings agencies does not sufficeas such independent judgment. Furthermore, Defendant's responsibilities with respect to theinvestments madewithPlaintiffs' andtheClass Plans' Collateral donot terminate uponthedecisiontoinvest. Defendant's fiduciary duties are continuous, and, accordingly, Defendant has anongoingduty to monitor the investments made with Plaintiffs' and the Class Plans' Collateral withreasonable diligence andto dispose of any inappropriate investments.

13 Defendant was hired bytheBoards ofTrustees asan investment manager toits SLP, thus theBoards ofTrustees are not liable for any acts oromissions ofBNY Mellon inits administration ofthe securities lending portfolio. Likewise, the Boards of Trustees are not required to invest orotherwise manage the Plans' securities lending assets that were subject to BNY Mellon'smanagement.

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B. The Inves tments51. Upon information and belief, from Defendant's representations, Plaintiffs viewed the

SLP asakin toa conservative moneymarket account. Defendant, upon information and belief, alsorepeatedly represented the SLP as low-risk. The Guidelines also evidence this sentiment in theirimplicit requirement that Defendant invest in conservative, low-risk instruments, with the goal ofearning an incremental return, and their focus onmaintaining principal. Such a low risk profilewasrequired because at the end ofthe lending term, the borrowers would return the borrowed securitiesand expect the return of their collateral (plus agreed-upon interest, known asa "rebate").

52. TheBoards ofTrustees, whose primary responsibility it is to protect the interests ofthe members and beneficiaries of the Plans, are comprised of city employees who, like theparticipating Plans' members, are not investment experts like Defendant. Accordingly, Plaintiffsdelegated all investment responsibilities with respect to the Collateral to Defendant, asophisticatedfiduciary and their investment manager.

53. Consistent with thedelegation, Plaintiffs relied onBNY Mellon, as a sophisticatedfiduciary and their investment manager, to prudently invest and manage its Collateral.

54. Accordingly, itis evident that Plaintiffs clearly delegated toand expected that BNYMellon prudently manage and invest their Collateral. Despite this, Plaintiffs did keep up to datewith the status of the SLP. Upon information and belief, Defendant made presentations andprovided reports to Plaintiffs regarding securities lending revenue, all ofwhich were substantiallysimilar and noted how revenue isgenerated and, upon information and belief, provided a securitieslending program overview which promoted the SLP, touted itssuccesses, reiterated itsinvestmentobjectives and depicted thePlans' SLP revenues and year-to-date performance.

55. Plaintiffs considered these monthly presentations and the statements made byDefendant, a sophisticated fiduciary and their investment manager, in assessing the SLP. Upon

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information and belief, according to Defendant, the SLP continuously generated revenues with nodownside. These presentations never discussed the risks associated with some of the Collateralinvestments. Nor did they discuss market concerns. Rather, the presentations continued to informtheBoards ofTrustees thattheSLP hadstrong credit/risk control, there hasbeennoclient losses inits 30-year history, andthattheSLP was generating revenues.

1. T he L ehma n Inves tment56. In its capacity as a sophisticated fiduciary and investment manager ofPlaintiffs and

the Class Plans' Collateral, Defendant purchased many types of securities purportedly for thebenefit of the class. Among these securities, Defendant purchased and held various floating ratenotes ("FRNs") in the Collateral Account. AFRN is abond with a variable coupon interest ratethat varies withthemarket rate. The coupon rate is typically equal to amoney market referencerate (such as LIBOR14 or the federal funds rate) plus a fixed spread.

57. In particular, Defendant invested Plaintiffs' Collateral in the Lehman Notes andpurchased many other Lehman securities with Class Plans' Collateral (the "Lehman Securities")(together, the "Investments"). The Lehman Securities at issue in this action include but are notlimited to, securities with the following CUSIP numbers: 52517PL33 and 52517PQ53.

58. The Investments had a significant credit risk associated with their high probability ofdefault. Credit risk is defined as "[t]he risk of loss of principal or loss of a financial reward

14 "LIBOR" refers to the London InterbankOffered Rate, which is derived from a filteredaverage of the world's most creditworthy banks' interbank deposit rates for larger loans withmaturities between overnight and one full year. As the rate atwhich the world's most preferredborrowers are able to borrow money, it represents themost widely used benchmark for short-terminterest rates around the globe.

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stemming from aborrower's failure to repay a loan or otherwise meet a contractual obligation."Credit risk is closely tied to the potential return ofan investment, the most notable being that theyields on bonds correlate strongly to their perceived credit risk." Id. The "higher the perceivedcredit risk, the higher the rate ofinterest that investors will demand for lending their capital. Creditrisksarecalculatedbasedon theborrowers' overall ability to repay. Thiscalculation includes theborrowers' collateral assets, revenue-generating ability and taxing authority (such as forgovernment andmunicipal bonds)."

59. Credit risks are a vital component of fixed-income investing, which is why ratingsagencies such as Standard &Poor's ("S&P"), Moody's and Fitch evaluate the credit risks ofthousands of corporate issuers andmunicipalities on an ongoing basis.

60. Asdetailed below, theInvestmentswereextremely riskybecausebeginning in2007and throughout 2008, there was tremendous uncertainty as to Lehman's financial stability.Moreover, quantitative data illustrates that the Investments were significantly risky due to theirimplied volatility and high risk of default. Despite this, Defendant imprudently held theInvestments until Lehman declared bankruptcy onSeptember 15, 2008, causing Plaintiffs and theClass Plans to suffermore than a billion dollars in damages.C. Defendant Knew of the Tremendous Uncertainty Surrounding Lehman's

Financial Stability61. Beginning in2007, and continuing into and throughout 2008, Defendant was aware

that investments in Lehman were risky.

15 See Credit Risk, Investopedia, http://www.investopedia.eom/terms/c/creditrisk.asp (lastvisited May 11, 2010).

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62. On July 10, 2007, the Associated Press Newswires published an article entitled"Banking shares fall after S&P warns itmay cut credit ratings on risky home loans," which stated inpertinent part:

Shares of major Wall Street banks fell Tuesday after Standard &Poor's said it may cut the credit rating onmore than $12 billion inbonds backed by risky home mortgages.Some of the 612 classes of bonds, known as residential mortgage-backedsecurities, that theratingsagencyis consideringdowngradingwere soldbybig-nameinvestment banks such as Bear StearnsCos.,Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

* * *

What all the bonds have in common is that they were backed bysubprime debt. S&P saidTuesday thatit is changing thewayit ratesbonds backed by this riskier type of debt because borrowers areincreasingly failing topayon time oraredefaulting altogether.63. On July 10, 2007, Reuters News published an article entitled "UPDATE 2US

banks, brokers shares fall on subprime woes,"whichstatedin pertinent part:Declines were led by banks perceived to have high exposure tomortgages and other fixed income businesses, including LehmanBrothersHoldings Inc. LEH.N, which fell 5percent, andBearStearnsCos. BSC.N, which fell as much as 4.1 percent.

64. On July 12,2007, theDow Jones Newswires published anarticle entitled "Wall StreetGirds for Legal, Financial Hits from Subprime," which stated in pertinent part:

The proliferatingmortgage securities crisis has led toanew guessinggame onWall Street: Which firms are most vulnerable tolosses, andis the greatest dangerlegal, reputational or economic?From a pure revenue perspective, Bear Stearns Cos. (BSC) andLehman Brothers Holdings (LEH) are more dependent on incomefrom originating, servicingandpackaging residentialmortgages intosecurities than rivals such as Goldman Sachs Group (GS), MerrillLynch& Co. (MER) andMorganStanley (MS).

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65. On July 18,2007, Reuters News published an article entitled "UPDATE 4Lehmandenies rumors about its subprimeexposure,"which stated in pertinent part:

LehmanBrothers shares are under pressure due to the fact that theymay have more exposure to the subprime market than previouslythought, saidWilliam Lefkowitz, options strategist atbrokerage firmvFinance Investments in New York.Lehman's option volatilitywas also higher on those subprime riskconcerns,said Paul Foster, options strategist atWeb informationsitetheflyonthewall.com. Lehman Brothers shares closed down $1.41 at$71.65 on the New York Stock Exchange.Lehman bonds also weakened relative to U.S. Treasuries. Noteswith a6.5percent coupon maturing in 2017 were trading at a yield of1.60 percentage points more than Treasuries. That margin widenedfrom 1.50 percentage points lateTuesday and from 1.4pointswhent he bonds were first sold last week.And in another sign investors were concerned about Lehman, thecost of insuring Lehman's debt with credit default swaps rosearound 10basispointsto 68basispoints, or$68,000 peryearforfiveyears to insure $10 million in debt.

66. On July 26,2007, Dow Jones Newswires published an article entitled "Cost ofBankCredit Protection Soars,Wall St At Storm Center," which stated in pertinent part:

Wall Street took a beating Thursday as banks faced off doublepunches dealt by faulty home loans and tepid demand for riskycorporate debt.The skyrocketing cost of credit protection for BearStearns Cos.(BSC), Lehman Brothers Holdings Inc. (LEH), Goldman SachsGroup Inc. (GS) andMerrill Lynch & Co. (MER), among others,coupled with declines in their respective stocks reflect investors'concerns that banks and brokers are at risk of potential big losses.That's becauseWall Street could be left holding the bag onbillions ofdollars ofdebt-laden corporate deals at a timewhenbad bets on riskyhome loans are already putting a crimp on earnings and business inthe banks' mortgage units.Investors in the credit derivatives market currently see Bear - whichhas already told clients in two of its hedge funds that their

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investments are virtually worthless - and Lehman asbanks worthy ofa speculative, or junk, rating.67. On July 26,2007, theDow Jones Newswires published an article entitled "STREET

SAVVY: Banks, Brokers Get Thumped asLoan Woes Escalate," which stated in pertinent part:How many times in the past few months haveweheard phrases like:'thesubprime issue iscontained' or 'corporate balance sheets are stillingreat shape' when confronted with fears about the unfolding creditmess?The problems don'tseem very contained anymore tothe shareholdersof large commercial and investment banks who have taken it onthechin the past several weeks and who face considerable uncertaintytoday.

* * *

'Nowthatwe're starting to spiral abit today, people aregetting a lotmorenervous,' saidPeterBoockvar, equitystrategist atMillerTabak.'We don't knowwhat their true exposureis because they reportedearnings before this stuffhit.'68. On July 31,2007, the Dow Jones Newswires published an article entitled "Investors

Still Wary OfWall Street's Credit Risk," which stated in pertinent part:Investors are still on guard when it comes to the credit riskofWallStreet, seen by many to be at the epicenter of the collective stormcreated by faulty home loans and tepid demand for risky corporatedebt.Though the cost of credit protection for such banks asBear StearnsCos. (BSC), Lehman Brothers Holding Inc. (LEH), Merrill Lynch &Co. (MER) and Goldman Sachs Group Inc. (GS) has fallen fromunprecedented heights lastweek, levels indicate that investors are stillwary.

* * *

. . . Last week, Lehman Brothers' cost of credit protection alsoreflected a Bal junk rating even though it is rated Al byMoody's.Lehman'scostof five-year creditprotection for$10millionofbondswas quoted Tuesday afternoon at$86,000 ayear, according toGFI. Itreached as high as $100,000 last week.

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69. On July 31, 2007, Bloomberg News published an article entitled "Bear, Lehman,Merrill Trade as Junk, Derivatives Show (Update 1)," which stated in pertinent part:

On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc.,Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good asjunk.Bonds ofU.S. investment banks lost about $1.5 billion of their facevalue this month as the risk of owning the securities increased themost since at least October 2004, according toMerrill indexes. Pricesof credit-default swaps based on the debt imply that their creditratings are below investment grade, data compiled by Moody'sI nve s to r s Se rv i ce show.The highest level ofdefaults in 10years on subprime mortgages and a$33 billion pileup ofunsold bonds and loans for funding acquisitionsare driving investors away from debt of the New York-basedsecurities firms. Concerns about credit quality may get worse becausebanks promised to provide $300 billion in debt for leveraged buyoutsannounced this year.

* * *

Prices of credit-default swaps for Goldman, the biggest investmentbank by market value, Merrill, the third largest, and Lehman, the No.1 mortgage bond underwriter, also equate to a Bal rating, data fromMoody's credit strategy group show.

70. On August 2, 2007, Reuters News published an article enti tled "RESEARCHALERT-S&P equity analysts downgrade Lehman to 'sell,'" which stated in pertinent part:

Standard & Poor's Equity Research cut its rating on shares ofLehman Brothers Holdings Inc. to 'sell' from 'hold,' citing concernsabout the value of the firm's mortgage-related positions and thedeterioratingmerger environment.71. On August 9, 2007, Reuters News published an article enti tled "RESEARCH

ALERTBernstein cuts investment bank profit estimates," which stated in pertinent part:Bear and Lehman last year were the leading underwriters ofmortgage-backed securities. The two companies are expected to takethe biggest hit because of rising subprime loan defaults and troublewith some mortgages made to borrowers with good credit.

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72. On August 10,2007, the Federal Reserve issued a press release entitled "The FederalReserve is providing liquidity to facilitate the orderly functioning of financial markets," whichstated the following:

The Federal Reserve will provide reserves as necessary through openmarket operations to promote trading in the federal funds market atrates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions mayexperience unusual funding needs because of dislocations in moneyand credit markets. As always, the discount window is available as asource of funding.73. On August 14,2007, theDowJonesNewswires published an article entitled "Lehman

Keeps Out OfHeadlines, But Stays InMarket's Crosshairs," which stated in pertinent part:Bear Stearns and Goldman are getting all the ink, but it's LehmanBrothers that's quietly taking the biggest hit.Shares in Lehman Brothers Holdings (LEH) fell sharply Tuesday,maintaining their status as the worst performing of all big brokeragestocks since the mortgage securities crisis exploded in mid-June.Lehman's shares are offmore than 32% since June 15,worse than the29% drop at Bear Stearns Cos. (BSC), which sparked the crisis whenit confirmed that two of its subprime mortgage securities-loadedhedge funds were collapsing.Lehman and Bear Stearns tend to be twinned in investors ' minds,because they are smaller and less diversified than Wall Street giantsGoldman Sachs Group (GS), Merrill Lynch & Co. (MER) andMorgan Stanley (MS). Yet Lehman is seen as taking more risk thanBear Stearns. And in the current environment, Lehman may bepaying a price for its relative silence about its exposure to troubledmortgages and high-risk debt.

74. On August 14, 2007, Reuters News published an article entit led "Shares of U.S.

investment banks drop," which stated in pertinent part:Shares ofU.S. investment banks dropped onTuesday, led by LehmanBrothers Holdings Inc, as investors fretted about mounting risks inproduct lines ranging from hedge funds to commercial paper.

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75. On August 16, 2007, PR Newswires published an article entitled "CountrywideSupplements Funding Liquidity Position," which stated in pertinent part:

Countrywide Financial Corporation (NYSE: CFC) announced todaythat it has supplemented its funding liquidity positionby drawing onan $11.5 billion credit facility. In addition, the Company hasaccelerated its plans to migrate its mortgage production operationsinto Countrywide Bank, FSB. 'As we have previously discussed,secondarymarket demand for non-agencymortgage-backed securitieshas been disrupted in recent weeks,' said David Sambol, Presidentand Chief Operating Officer. 'Along with reduced liquidity in thesecondary market, funding liquidity for the mortgage industry hasalso become constrained.

76. On August 17, 2007, the Federal Reserve issued a press release which stated inpertinent part:

Financial market conditions have deteriorated, and tighter creditconditions and increased uncertainty have the potential to restraineconomic growth going forward.77. On August 22, 2007, Reuters News published an article entitled "Lehman to shut

down subprime unit, record charge," which stated in pertinent part:Lehman Brothers Holdings on Wednesday said it is shutting downsubprimemortgage unit BNC Mortgage Corp., affecting the jobs of1,200 employees in 23 cities and resulting in a $25 million charge.

78. On August 23, 2007, nabCapital issued an analyst report entitled "At a glance -Lehman Brothers - The Fixed Income Specialist getting out of Subprime." This report stated asfollows:

We reiterate what we said back on the 10th ofAugust, that S&P's reasons for goingNegative on Bear Stearns "could also apply to Lehman Brothers and S&P could havethem in their sights". While today's announcement is not material from an absolutecapital or earnings perspective, it does potentially load another bullet into the gun,which if S&P is going to fire it will probably be after the company releases what weexpect to be a particularlyweak 3Q result (applies sector wide).

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From a trading perspective we think that as a result of having smaller and lessdiversified revenues, Bear Stearns a nd L eh ma n' s w il l c on ti nu e to be moresusceptible than the larger brokers are to the subprime related events which areexpected to remain an issue fo r at least the remainder o f2007. We also think thatfrom a credit ratingsperspective (though we acknowledge it hardly matters at themoment) it's fair to state that Bear's and Lehman's ratings will come undergreater pressure as their overall revenues are also are more reliant on the fixedincome markets. Therefore, while liquidity remains as tight as it is, the 40bps-50psCDS differential between the larger brokers and the smaller ones (Bears andLehmans) should be respected and in the short term if it is going to change, its [sic]likely to widen rather than narrow, particularly relative to the broader market.79. Likewise, on December 14,2007, Punk Ziegel & Co. issued an analyst report, rating

Lehman a "Sell" and stating that:I have raised the Lehman estimates slightly but they are still well below streetconsensus. Moreover, I do not expect 2009 earnings to be as high as 2007 earningsfor this company. The target price on the stock has been lowered despite thisadjustment in the estimate to reflect the fact that the multiple on this stock isdeclining in response to a murkier outlook.Balance sheet re-engineering is not the core of this company. Operating businessesare. Theoutlookfo r these businesses is notpositive. Therefore,even though this isone o f the most impressive companies in thefinancial sector, its stock should bea v o i d e d .

80. On March 17,2008, Bear Stearns, the fifth-largest U.S. investment bank, was sold toJPMorgan Chase "for the investment-bankingequivalent ofpocket change,"BusinessWeek reportedthe day after the collapse.

81. The Bear Sterns collapse raised numerous red flags as to the soundness ofmaintaining the SLP Collateral in Lehman. To this end, on March 17, 2008, the Dow JonesNewswires published a column entitled "IN THE MONEY: Why Lehman May OrMay Not BeTheNext Bear. " This article stated in pertinent part:

NEWYORK (Dow Jones)~There are a number of reasons to think Lehman BrothersHoldings Inc. (LEH)won't be the next Bear Stearns Cos. (BSC) - but at least one bigreason to think it might.Lehman's stock tumbled 19% Monday to its lowest level in years, on investorconcern that the liquidity crisis that nearly wiped out BearmightstrikeLehman or

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another big investment bank next. The firm roundly denied it had anythingresembling a liquidity problem, but then so did Bear, just days before it almostcollapsed and was forced to accept a takeover by JPMorgan Chase & Co. (JPM) at atiny fraction of its book value.

But there's at least one reason for concern: Lehman has sizable exposure to diceymortgage securities andotherhard-to-value instruments that couldbea drag on itsliquidity. That same issue contributed to the problems at Bear.

But then there's the mortgage issue. As of the end of its fiscal year in November,Lehman held $42 billion worth of"Level 3" securities - illiquid, write-down-pronesecurities valued using Lehman's estimates and models instead ofactual market data.Of that amount, $25.2 billion are mortgage and asset-backed securities, making themeven dicier.The $42 billion amounts to 14.4% ofLehman's total financial instruments, and about1.9 times the company's entire shareholder equity. Bear had even higher exposure bysome measures, but Lehman's is significant.82. Also, on March 17,2008, the DowJones Business News published an article entitled

"Moody's Cautions On Outlook For Lehman; Shares Poised To Fall." This article stated inpertinent part:

Earlier Monday, Moody's said that it affirmed its Al rating on the senior long-termdebt ofLehman Brothers (LEH) but lowered its outlook on Lehman ratings to stablefrom positive.

'However, these conditions have decreased the upward pressure on Lehman's rating,and therefore a positive outlook is no longer warranted,' the ratings agency said.83. Also, on this date, The Huffington Post published an article entitled "Is Lehman

Next?" that questioned the "possibility that Lehman will face a run like the one that brought downBear Stearns." The article reported that the market's "concerns were intensified when UBSdowngraded Lehman stock to neutral from buy . . . , and analysts at ING speculated that Lehman

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maynot playa big enoughrole in themarkets to justify a Fed-backed bailout like the one at BearStearns ."

84. On March 18, 2008, a WallStreet Journal article entitled "Lehman Finds Itself InCenter Of a Storm" was circulated to a number ofStandishMellon employees. This article statedin pertinent part:

But Lehman's shares already had tumbled 15%Friday on worries that the company,founded in 1850 as an Alabama cotton trader, could face the same kind of liquiditysqueeze as Bear Stearns Cos.Yesterday, fears touched off by Bear Stearns's meltdown sent Lehman sharesplungingby asmuch as48%. At4 p.m., theywere down 19%, or $7.51,to $31.75-a 4 Vi -year low - in New York Stock Exchange Composite trading. . . .85. The published version of this article contained the following chart:

Troubled IndustryPerformance of LehmanBrotters stock vs . th einvestment services sector L>>r w C'f-tv > Jow Km s t'i '.lsJi ii! U.S.

ri '5t"*w j i v rt 5 Index

-ICO I I I 1 I ( I I ( I 1 J I ! Izoo? m

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87. The same article stated that the Bear Stearns takeover was causing Wall Street toworry"that thehigh-stakes gameof dicethebig firmswereplayingwithasset-backed securities ofdubious quality may force more players to exit the table."

88. This should have been a clear indication to Defendant of the inherent credit riskof th eInves tmen ts .

89. On March 29,2008, the Wall StreetJournalpublished an article entitled "UndertowofWorry Again Tugs on StocksAfter an Initial Climb, Shares End Lower, DJIA Falls 1.2%inWeek." This article stated in pertinent part:

Citigroupupgraded investment bank LehmanBrothersHoldings,whose shareshavefallen sharply amid talk of liquidity troubles. But options traders were still bettingheavily against Lehman and another broker that has suffered during the creditcrunch, Merrill Lynch. Lehman ended the day down 2.2% at $37.87, while Merrilllost 4.7% to 39.93, pulling other financials lower. Citi and American Express werethe worst performers in the Dow industrials, falling 4.4%to20.83 and 3.8%to43.15,respectively.90. The demise ofBear Sterns and the various news articles detailed herein, which cast

doubt on Lehman's financial stability, informedDefendantof the risks associatedwith theLehmanSecurities, including their significant credit risk. In light ofDefendant's knowledge, Defendant'simprudent maintenance of the Lehman Securities violated the Agreement, the Guidelines, andDefendant's fiduciary duties as detailed in ^[179-189 below.

91. According to BNY Mellon Corp.'s 2008 Annual Report, Defendant's RiskCommittee"is comprisedof independent directorsandmeetsona regularbasis to reviewand assessour risks, and to control processes with respect to such risks, and our risk management andfiduciary policies and activities." Therefore, Defendant knew or should have known ofLehman'sdestabilizing financial condition.

92. Despite these clear admonitions and the numerous red flags that indicated that theLehman Securities had significant credit risk (see, e.g., Iflfl 37-164 below) in contrast to the ratings

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provided by the Credit Ratings Agencies ("CRAs"), BNY Mellon failed to question the ratingsissuedby theCRAs. Instead, Defendant continued to holdthe riskyInvestments in Plaintiffs' andtheClassPlans' portfolios. In suchaway,Defendant violatedtheAgreement, theGuidelines andits fiduciary duties as detailed in 1ffll79-l89 below.

93. Lehman's problems continued to mount. On June 2, 2008, Dow Jones Newswirespublished an article entitled "2ndUpdate: S&PCutsRatingOn Lehman, Merrill, M. Stanley."This article stated in pertinent part:

NEW YORK (Dow Jones)~Standard & Poor's Corp. rattledinvestors' confidence in three big investment banks on Monday,cutting the ratingsofLehmanBrothersHoldings Inc. (LEH),MerrillLynch& Co. Inc. (MER) andMorganStanley (MS) by a notch.The credit-rating agency was most critical of Lehman, whosebusiness profile is closest to that of the recently collapsed BearStearns Cos., saying its operating performance is under pressure.'We expect a relatively meaningful deterioration in Lehman'ssecond-quarter performance, owing to a generally slower businessenvironment, additional writedowns on certain troubled exposuresandthe negativeeffectsofhedges,' the rating agency saidas it slicedthe firm's long-term ratings to A from A+ and kept a 'negativeoutlook' on Lehman. A negative outlook implies a one-in-threelikelihood of another downgrade within about two years.

94. On June 3, 2008, the Wall StreetJournal published an article entitled "Losses PushLehmanToWeigh Raising New Capital." This article stated in pertinent part that:

Lehman Brothers Holdings Inc., set to report itsfirst quarterly losssince goingpublic, is consideringraising billions of dollars in freshcapital to help shoreup itsbalance sheet,accordingtopeoplefamiliarwit h t he matter .The exact amount of the capital hike isn't known, but analysts andWall Street executives estimate it is likely to be $3 billion to $4billion. They said Lehman would probably announce the capitalraising in conjunctionwith its quarterlyresults, due theweekof June16. The amount of new capital under consideration suggestsLehman's quarterly loss could be larger than the $300million orsothat some analysts have been expecting.

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On Monday, shares in the 158-year-old firm fell $2.98, or 8%, to$33.83 on the New York Stock Exchange after negative commentsfrom twoWall Street analysts. The shares are down almost 50% thisyear compared with year-to-date drops of about 20% for rivalsGoldman Sachs Group Inc. and Morgan Stanley. The new capitalwould likely be raised by issuing common shares, diluting currentshareholders, people familiar with the matter said.

Nonetheless, some investors remain concerned that relative to its size,Lehman is holding more securities tied to both residential andcommercial real estate than any other big Wall Street broker,according to Bernstein Research.

Mortgage Exposure'Lehman still has a lot of exposure to the mortgage market, and theyare going to need capital to get through it,' saidUBS analyst GlennSchorr.On Monday, Standard & Poor's cut long-term debt ratings onLehman, Merrill Lynch &Co. andMorgan Stanley.Thecredit-ratingagency focused in particular on Lehman, saying it expects a'relatively meaningful deterioration' in the firm's earnings for itssecond quarter, which endedMay 31.Also Monday, Merrill Lynch analyst Guy Moszkowski lowered hisratingon Lehmanstock to underperform fromneutral. Oppenheimer& Co. analyst Meredith Whitney swung her earnings forecast to aloss from a profit.

But Lehman's second-quarter results are expected to show some freshdifficulties. The firm is saddled with billions ofdollars in hard-to-sell commercial real-estate assets and leveraged loans and isexpected toface further write-downs on theseportfolios. That hasled the firm to consider raising additional capital. Wall Street firmsincluding Merrill Lynch and Morgan Stanley have also raisedbillionsof dollars as losses from the mortgage meltdown have mounted.

The S&P downgrades came after the ratings agency completed areview of the entire securities industry. S&P said it believes Lehman-32-


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and other securities dealers' revenues may decline more thananticipated based on the firms' still large exposures to illiquid andhard-to-value assets.S&P analyst Scott Sprinzen said the Federal Reserve's decision toallow brokers to borrow money directly from the Fed, 'gave us thecomfort not to go further with some of the downgrades that we did,'he says. 'But we can't count on that indefinitely.'

95. Upon information and belief, the S&P downgrades were circulated to BNY MellonAsset Servicing executives, including individuals in Risk Management of the Securities LendingDivision ofBNY Mellon Asset Servicing.

96. On June 4, 2008, the Wall Street Journal published another article concerningLehman. This article entitled "Lehman Is Seeking Overseas Capital As Its Stock Declines,"stated:

Lehman Brothers Holdings Inc., facing a sharp decline in its stockthat will make it more difficult to raise fresh capital, may look to aforeign land for a strategic partner.The Wall Street firm has managed to raise capital from a rich base ofexisting U.S. shareholders, but this week reached out to overseasinvestors, including at least one in South Korea.The firm has a long history in South Korea, an effort led by the firm'swell-connected vice-chairman Kunho Cho. The options for Lehmaninclude the Korea Development Bank and Woori Financial Group.One person familiar wi th the situation said it is unlikely KoreanInvestment Corp., an investor in Merrill Lynch & Co., would be aninvestor.The news comes during a rough week for Lehman, whose stocktopped the New York Stock Exchange's most- active list Tuesday andclosed down 9.5%, or $3.22, at $30.61 on the New York StockExchange.Tuesday's trading wiped $1.72 billion off ofLehman's market valueand the closing price was Lehman's lowest since August 2003.Tuesday, The Wall Street Journal reported that Lehman, which isse t to post one of the biggest quarterly losses in its history, wasconsidering raising fresh capital. Analysts and Wall Street executives

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believed the capital raise could top $4 billion. Lehmanmaintains it iswell positioned to weather the current credit crisis and said raisingcapital is simply one ofmany options it [sic] considering.The Wall Street firm's shares had tumbled nearly 15% at one pointTuesday as investors who feared their stakes would be diluted soldshares and rumors flew on trading desks that Lehman had gone to theFederal Reserve for funds. Lehman s ai d t ha t wasn ' t true.But a second rumor, that Lehmanwas buyingback shares, turned outto be true, people familiar with the situation said. Such buying helpedthe stock pare its losses Tuesday. (Please see Abreast of the Market,and Heard on the Street.)Still, the stock has fallen 18% in the past three sessions.It was unclear how much stock Lehman Brothers bought back, butwith shares trading at roughly 22% below its book value at the end ofthe first quarter, the buying could be seen as a vote of confidence bymanagement.Indeed, over the past year, the announcement of a capital-raising byfinancial firms has been a buy signal for investors. Yet for Lehman,which has already raised $6 billion in capital during the crisis andseen its s tock fall, sel ling shares may be prohibitively expensive,according to a person familiar with the matter.Alternatively it could be viewed as a waste of precious capital,though Lehman has nearly about $40 bill ion in liquid assets on itsbalance sheet and has access to funding from the Federal Reserve, soshort-term capital issues are not a major concern for Lehman.

97. Additionally, on June 4, 2008, Wachovia Capital Markets, LLC published a FixedIncome Research report, entitled "FIG Daily Snapshot," which provided the following creditsummary :

According to recent media speculation, LEH may seek to sell anadditional $4 bill ion in common equity less than two months afterselling a similar amount in an attempt to improve sentimentsurrounding the company. We believe a sale of a minority s take to ahigher-rated financial institution - or an outright sale - could provethe best means of reducingmarket concerns about LEH. We note thatthe impact of lower ratings on LEH's collateral requirements wouldrise materially in the event ofa two-notch downgrade of the holdco'sdebt ratings.

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98. Also, on June 4, 2008, The New York Post reported that "[t]raders are betting thatLehman Brothers could face Bear Stearns-style trouble" and that its "perception of risk is threetimes higher than [Lehman 'sj peers and is approaching the same level as when Bear Stearnscollapsed."

99. On June 9,2008, the Dow Jones Newswires published a story entitled "Moody's CutsLehman Outlook to Negative," which stated that "Moody's says its outlook for credit ratings atLehman is now negative, as an unexpectedly deep 2Q loss has raised questions about theinvestment bank's riskmanagement. Outlook change meansMoody's thinks Lehman's creditratings could deteriorate over th e long term."

100. Also, on this day, the Dow Jones Newswires published an article "Lehman to Raise$6B After Deep $2.8B Loss," which further elaborated on the Moody's credit rating. This articlestated in pertinent part:

Moody's Investors Service lowered its outlook for the bank's creditratings to negative, expressing concerns about Lehman's ability tomanage the risks in its still-large exposures to commercial andresidential mortgages and signaling the market may not have mucht o le r ance fo r fu rther losses.'The rating action also reflects Moody's concerns over riskmanagement decisions that resulted in elevated real estate exposuresand the subsequent ineffectiveness of hedges to mitigate theseexposures in the recent quarter,' Moody's wrote in a release. 'Anyadditional net valuation marks that result in firm-wide losses incoming quarters would raise serious concerns about theeffectiveness of Lehman's risk management and may createadditionalmarket unease about the firm, potentially weakening itsfranchise.'Fitch Ratings cut its grade one notch to A+, noting Lehman's'increased earnings volatility,' the lack of securitizations and 'thelevel of risky assets exposing earnings to challenges in hedgeeffect iveness . '

101. Upon information and belief, BNY Mellon employees were made aware that:-35-


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Lehman Brothers unveiled plans to raise $6billion offresh capital, asthe brokerage said it expects a second-quarternet loss of about $2.8billion. Its shares sank more than 10%. Lehman plans to raise $4billion by offering 143million sharesof common stockat $28 apiece[sic], expanding the bank's shares outstanding by 25%.The companyis also selling $2 billion in preferred shares that will carry an 8.75%yield and be convertible into common stock in a price range between$28 and $33 each. Theprojected loss isfour times worse than WallStreet'smostpessimistic estimate. The damage was driven bywritedowns and hedging losses.102. On June 10, 2008, the WallStreet Journal published another article entitled "Big

Loss At Lehman Intensifies Crisis Jitters." This article stated in pertinent part:Lehman Brothers Holdings Inc.'s projectionMondayofa $2.8 billionquarterly loss deepened anxieties that banks and securities firms willsuffer even more than expected as they slog through the credit crisis.The New York securities firm's announcement that it expects toreport itsfirst net loss since goingpublic in 1994 along with aflurry of other downbeat market news caused financial stocks totumble .Analysts and investors who had been hoping the worst was over nowseem resigned to a different reality one that likely includes morebad loans, souring securities andmuch-needed capital infusions in thecoming months.Lehman's larger-than-expected loss was accompanied, as anticipated,by word that the firm will seek to raise $6 billion in fresh capital. OnWall Street, the loss underscored the challenges Lehman and its rivalsmust face as they dramatically reduce their reliance on borrowedmoney. The use o f debt, which helped fuel record profits whenmarkets were booming but also led to excessive risk-taking, ha sc o m e b a c k to h a u n t t h e m .As Lehm an and oth er securities firms now curtail their use o fborrowed cash, it will be much harder for them to generate the kindof profit growth investors had become accustomed to.Another challenge: The market's turbulence has all but caused thedisappearance of certain businesses that were a gold mine for WallStreet ~ from packaging mortgages to making big corporate loans.The loss of those cash cows means it will take even longer to recoverf rom t he current mess .

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Lehman, now the smallest of the four major Wall Street firmsfollowing the shotgun marriage ofBear Stearns Cos. to J.P. MorganChase & Co., has long been a hardy competitor. Its leader, RichardFuld Jr., isWall Street's longest-serving chiefexecutive. But despitespending billions ofdollars to expand into stock trading, investmentbanking and asset management, Lehman has had a hard timestretching beyond its roots as a bond house. It is being pummeledafter taking on large amounts of mortgage debt and extendingloans on corporate buyouts during the boomcategories ofassetsthat havefallen sharply in value.'Other firms canmitigate losses, but Lehman is just working from asmaller, more concentrated capital base,' said MeredithWhitney, ananalyst at Oppenheimer & Co. 'It is not like the diversificationstrategy didn't work. It is just still a work in progress.' Lehmanofficials didn't return calls seeking comment Monday.While times are tough for financial firms, the deep fears that grippedinvestors and traders earlier this spring, causing a customer exodusfrom Bear Stearns, have largely subsided. Lehman's troubles seem tocenter on the future ofthe securitiesfirm's business model, not theamount ofcash it has to keep the firm going on a day-to-day basis.After Bear crumbled, securities firms obtained access to a FederalReserve borrowing facility for the first time onmuch the same termsas banks. That gives Wall Street firms another source of cash. Lastweek, Lehman said it hadn't used the Fed lending facility since April16.

Lehman shares tumbled 8.7%, or $2.81, to $29.48 in NewYork StockExchange composite trading at 4 p.m. Lehman plans to offer $4billion in common stock, priced at $28 a share, and another $2billionin preferred shares that will convert to common stock.Part of the stock decl ine s tems from investor frustration over the $6billion in fresh capital raised by the company. That infusion hasincreased its cushion against potential losses but is diluting the valueof Lehman's common-stock by about 30%.Some shareholders have grown increasingly leery of Lehman'smanagement, which has bolstered its balance sheet with $12billionso far this year. Inmid-March, Lehman ChiefFinancial Officer ErinCallan said the firm 'took care of our full-year needs' when it raised$1.9billion through anoffering ofpreferred stock inFebruary. In lateMarch, Lehman raised another $4 billion. Although it said the money

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wasn't really needed, it wanted to allay fears about its capital positionin the wake of the sale ofBear to J.P. Morgan.'There is a credibility issue here,' said William B. Smith, presidentofSAM Advisors LLC, which holds about 45,000 Lehman shares andwas buying more Monday. 'Never did I ever think I would say thatFuld and his team had one, but they do. If you don't need capital,why are you raising it?'

It doesn't help that Lehman upped its exposure to commercial realestate and leveraged loans at exactly the wrong time.As a sign of the push to reduce its risk profile, Lehman said itsleverage ratio or the multiple by which its borrowings exceed itsequity fell to 25 times from 31.7 times at the end of its fiscal firstquarter. The retrenchment includes the sale of$130 billion in assets.In Lehman's struggling commercial-mortgageportfolio, the firm soldmore than $7 billion in commercial mortgages.Ms. Cal lan said Lehman had finished its de-leveraging process. Incomparison, Goldman's gross leverage ratio was 27.9 at the end of itsfiscal first quarter, while Merrill Lynch's was 23.8. Lehman's dourresults included negative net revenue of $3 billion from fixed-income trading, compared with $300 million in the year-earl ierperiod.Lehman also projected net revenue ofjust $600 million from tradingstocks, an area that brought in $1.4 billion in the first quarter.Expenses rose 21% during the fiscal second quarter to $3.4 billion,hurt by a 22% surge in compensation costs. Lehman will report nextMonday full results for its fiscal second quarter ended May 30.Moody's Investors Service lowered its outlook for the bank's creditratings to negative, expressing concerns about Lehman's ability tomanage the risks in its still-large exposures to commercial andresidential mortgages and signaling the market may not have mucht o le r ance fo r fu rther losses.

'The rating action also reflects Moody's concerns over riskmanagement decisions that resulted in elevated real estate exposuresand the subsequent ineffectiveness of hedges to mitigate theseexposures in the recent quarter,' Moody's wrote in a release. 'Anyadditional net valuation marks t ha t r es ul t in f irm-wide los se s incoming quarters would raise serious concerns about the effectivenessof Lehman's risk management and may create additional marketunease about the firm, potentially weakening its franchise.'

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Fitch Ratings cut its grade one notch to A-plus, noting Lehman's'increased earnings volatility,' the lack of securitizations and 'thelevel of risky assets exposing earnings to challenges in hedgeeffect iveness. '

103. The published version of this article also contained the following chart:

Off TrackYear-to-date performance

DJ industrialAverage

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zmSoyrie: WSJ Martast OiU Group

104. On the same day, the Wall StreetJournalpublished "Lehman's Property Bets AreComing Back to Bite." This article stated in pertinent part:

The stunning $2.8 billion second-quarter loss Lehman BrothersHoldings Inc. announced Monday stemmed in part from two big real-estate investments made at high prices near the top of the market thatare coming back to bite the investment bank.Lehman joined with Tishman Speyer Properties last year to pay $22billion for real-estate investment trust Archstone-Smith in the largestapartment-buildingdeal ever. And in a seriesofprojects, it teamed upwith Irvine, Calif.-based land developer SunCal Cos. to develop andsell thousands o f house l ot s t o builders across Southern California.Some $1.6 bil l ion of assets from those deals r emai n on Lehman'sbooks.Inboth cases, Lehman dove into already heated markets, overpaid forthe properties and, the firm says, has taken big markdowns. OnLehman's conference call discussing its second-quarter loss and its$6 billion capital raising, the bank's finance chief, Erin Callan,said the firm had taken a 'significant' write-down on itsArchstoneinvestment and the loss on its SunCal properties was 'similar to

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other large transactions that have occurred in relevant markets.'She wouldn't give the size of the write-downs.Lehman solda whopping $7 billion in commercialmortgage assetsin thepast threemonths.About $1.4billion of the $3.7 billion of netlosses it reported Monday from marking the value of its assetportfolio down to what it is really worth was in its commercialmortgage portfolio and other real-estate investments, includinghedges.But Lehman is still left with a commercial real-estate debt portfolioof about $29 billion, a high figure compared with many otherinvestment banks. And that could face more damage if the falteringeconomy results in a rise in delinquency rates, which have remainedlow by historical standards.

Since the beginning of the firm's 2007 fiscal year, Lehman has takena total of $3.5 billion in write- down s related to c ommer cia lmortgages and held-for-sale real estate.

105. Also, on June 10, 2008, Axess Daily: Corporate Bond Edition published: "High-Grade Market Holds Its Own Amid Financial Woes." This article stated in pertinent part:

Indeed, the benchmark high-grade credit derivatives index, the MarkitCDX IG10, was little changed at midpoint 116.5 basis pointscompared with Friday's closing level, despite Lehman Brothersanticipating a $2.8 billion second-quarter loss, according to data froma market participant and Markit.Lehman, which has been battling market concerns, raised $6 billionin capital, $4 billion through selling common shares and$2billion inmandatory convertible preferred stock.

Reflecting worries on Lehman, Fitch Ratings cut Lehman's creditratings one notch to A+ from AA-. The outlook remains negative.Fitch cited 'increased earnings volatility, changes in its businessmixdue to contraction in the securi t izat ion and s t ruc tured credi t market sand the level of risky assets exposing earnings to challenges in hedgeeffect iveness . 'Moody's Investors Service cut its outlook on Lehman's rating tonegative, and Standard & Poor's said its rating on Lehman, which

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was recently cut to A on negative outlook, is unaffected by thebroker's $2.8 bi ll ion loss.

106. OnJune 12,2008,AxessDaily:CorporateBondEditionpublished anothernewsletterentitled: "Financials Trashed: Lehman in Firing Line." This article stated in pertinent part:

Earlier this week, Lehman, which has been at the center of recentfears, said it posted a $2.8 billion loss in the second quarter, andraised $6 billion in fresh capital to help offset the write-downs.Lehman's cause was also not helped by downbeat comments fromMerrill Lynch, which downgraded the firm to neutral from buy.Merr

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