N.C. sues BNY for $95 million Lehman investment

March 15 (Reuters)—North Carolina officials on Thursday accused Bank of New York Mellon Corp. of making an unauthorized $95 million investment in Lehman Brothers Holdings Inc. for the state and joking about the investment bank's precarious footing just days before it collapsed.

The lawsuit, filed in North Carolina's General Court of Justice, accuses BNY Mellon, the world's largest custody bank, of making the investment in December 2006 on behalf of state employees' retirement funds.

"Instead of taking action to protect the state or any other securities lending clients by selling Lehman notes, which were still trading at high value," the lawsuit said, "an executive of (BNY Mellon) stated, 'My fingers are permanently crossed at this point ... don't quit going to church!!!'"

BNY Mellon denied any wrongdoing.

"We believe the suit is without merit, and we will defend ourselves vigorously," a BNY Mellon spokesman said.

The value of the investment for the North Carolina pension funds plunged by about $70 million after Lehman filed for bankruptcy protection in September 2008.

The North Carolina treasurer, who filed the lawsuit, said the Lehman investment had a maturity in excess of two years and less than three years, but was rated below the "AA" level that the state required for such an investment.

The securities lending program was supposed to be a low-risk way for the pension funds to earn fees to offset some of their back-office costs.

The lawsuit said BNY Mellon had invested more than $2 billion in Lehman notes for itself and clients.

"If it started selling Lehman notes as a prudent fiduciary would in light of Lehman's financial condition, that might cause a run on Lehman, and thus it had a conflict of interest," the lawsuit said.

Shares of BNY Mellon were up 4.6% at $24.26 in afternoon trading.