BlackRock Inc., the world’s biggest money manager, is accused in a lawsuit by two pension funds of reaping “grossly excessive” compensation from securities-lending returns associated with iShares Inc.
“Defendants have systematically violated their fiduciary duties, setting up an excessive fee structure designed to loot securities lending returns properly due to iShares investors,” the funds, which invest in iShares, said in a complaint in federal court in Nashville, Tennessee.
Investment funds with holdings in stocks or other securities can earn more by lending out their holdings to borrowers, including short sellers, those betting the value of a security will fall. Investors who lend out the securities divide the proceeds with a securities lending agent. Some funds, including BlackRock, use their own securities-lending operation.
The pension funds allege that BlackRock affiliates collected 40 percent of revenue earned from securities lending transactions as compensation.
Blackrock said the suit is without merit and will contest it.
“Our securities lending program has delivered above average returns to our ETF shareholders over time,” said Caroline Hancock, a BlackRock spokeswoman, in an e-mailed statement. “To achieve this, we run the program ourselves while bearing all the costs, rather than outsourcing to third parties as others do.
The suit, filed by Laborers Local 265 Pension Fund, based in Cincinnati, and Plumbers and Pipefitters Local No. 572 Pension Fund, of Nashville, names BlackRock Institutional Trust Co., iShares Trust, iShares Inc. and nine other BlackRock affiliates.
Also named are BlackRock president Robert Kapito, Michael Latham, the chairman of Ishares Inc., and seven other officials of whom are trustees of iShares Trust and directors of iShares Inc.
The pension funds, in the suit filed Jan. 18, seek financial penalties including unspecified damages and a ban on lending of iShares securities “absent a fairly and openly negotiated contract between iShares or individual funds and an independent lending agent.”
The Financial Times earlier reported on the lawsuit.
The case is Laborers Local 265 Pension Fund v. iShares Trust, 13-cv-00046, U.S. District Court, Middle District of Tennessee, (Nashville).