Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 1 of ...

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 2 of 36 PAGEID #: 2investment of cash collateral as part of the securities lending program that Wachoviaoperated on SERS’ behalf.2. The practice of securities lending has been aptly described as “Heads, wewin together. Tails, you lose – alone.” See Louise Story, Banks Shared Profits, But NotLosses, N.Y Times, October 17, 2010. This description reflects the fact that firmsoperating securities lending programs, which are typically Wall Street banks, structuredthe relationship so that they stood to share in whatever gains their clients made from theinvestments the banks made. However, their clients, which are typically public andcorporate pension funds, were exposed to the exclusive risk of loss.3. The securities lending concept is relatively simple. In general, aninstitutional investor temporarily loans a security from its portfolio to a broker/dealer tosupport the broker/dealer’s trading activity. In return, the lender of the security receivescollateral, usually in the form of cash, which can then be invested by the lender’s agent,usually a bank, until the security must be returned. Of course, when the security isreturned to the lender, the lender must simultaneously return the collateral to theborrower. If the collateral was in the form of cash, that means any investment of thatcash must be liquidated and the cash collateral returned to the borrower. To the extentthe investment earned any interest or a return to the lender, it is shared between the lenderand the lender’s agent (the bank), purportedly as compensation for administering thesecurities lending program.4. Wachovia, like other firms engaged in securities lending, marketed theirprograms as being a low-risk way to earn small additional returns on securities held in theportfolios of public and private pension funds. Indeed, “these trades were supposed to be2