Investment managers Perpetual Ltd is suing the Bank of New York in a British court on behalf of more than 1,000 investors who bought credit-linked notes issued by Mahogany Capital.

Perpetual’s subsidiary, Perpetual Trustee Company (PTCo), has started legal action against BNY Corporate Trustee Services (BNYT), which is a member company of the Bank of New York Mellon Corporation, in England’s High Court.

Retail investors bought $125 million of Mahogany notes through Grange Securities, an Australian subsidiary of Lehman Brothers Holdings Inc.

Mahogany, a special purpose company providing access to new investment products, then used the money to buy credit-linked notes issued by Saphir Finance plc, to provide the source of funds to pay the interest and principal on the Mahogany notes.

Saphir subsequently used the proceeds from its notes to buy collateral (bank-issued medium-term notes) to secure its obligations under a credit default swap agreement with Lehman Brothers Special Financing, and under the relevant credit-linked notes sold to Mahogany.

BNYT is the trustee for the Saphir note holders and holds security from Saphir over the collateral for the benefit of certain creditors, including the holder of the Saphir notes.

After Lehman filed for bankruptcy in September 2008, payments to Mahogany and Mahogany investors stopped.

PTCo, which currently holds two series of notes issued by Saphir, claims that Mahogany investors are entitled to the proceeds of the collateral ultimately backing the Mahogany notes following Lehman’s insolvency.

“PTCo had given directions to BYNT to enforce the security held over the collateral and to apply all monies it receives from the enforcement for the benefit of Mahogany investors,” Perpetual said.

“To date, these directions have not been acted upon, prompting PTCo to commence legal proceedings.”

Perpetual Corporate Trust chief executive Chris Green said the lack of action was due partly to pressure from Lehman’s bankruptcy trustee.

Perpetual said it was working with Mahogany directors in taking the legal action.

AAP