Cases & Deals

Bear, Stearns Securities and Morgan Stanley Securities resolve securities lending dispute

Clients Bear, Stearns & Company Inc., Bear, Stearns Securities Corp., Morgan Stanley Securities Services Inc.

Jones Day represented Bear Stearns and Morgan Stanley in an action that arose during the early to mid-1990s, where Plaintiff, the Northern Trust Company, a major securities lender, loaned shares of a Registered Investment Company to various broker-dealers. While the securities were out on loan, the RIC declared, but did not distribute, long term capital gains, a percentage of which it paid to the IRS in satisfaction of taxes on the distribution that would be owed by most taxable shareholders in the RIC. If the shareholders were tax exempt, however, they could seek a refund of the amount paid by the RIC on their behalf from the IRS. Despite the shares being out on loan on the record date, Northern Trust sought a refund of the taxes paid by the RIC on behalf of certain of its tax exempt clients for which it had acted as lending agent in loaning the shares to the broker-dealers. In 1998, the IRS sued Northern, alleging that it had improperly claimed the tax credit. In 2005, after unsuccessfully attempting to defend the action on statute of limitations grounds, Northern settled with the IRS. Northern then sued the broker-dealers alleging breach of contract and other common law claims, asserting that, under the parties' securities lending agreements, the broker-dealers were required to compensate the lenders of the securities for the value of the tax credits they would have received had they not loaned the securities over the record date. Northern also sought recovery from the broker-dealers of the attorneys' fees and interest it incurred in defending the IRS litigation. Jones Day succeeded in having many of the counts dismissed at the 12(b)(6) stage, and ultimately the parties settled on mutually agreeable terms.

The Northern Trust Company and American Casualty Company of Reading, Pennsylvania, v. MS Securities Services Inc., Bear, Stearns and Company, Inc., and Bear, Stearns Securities Corporation, No. 05-3370 (N.D. Ill.)

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