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Home > Cases > State Street > When Safe Investments Aren't

When Safe Investments Aren't

The Boston-based financial services giant, State Street, continues to take heat over its management of bond funds that were touted as safe, conservative investments, yet posted significant losses this past summer because of holdings tied to the subprime mortgage industry.

State Street marketed its Limited Duration Bond Fund, Intermediate Bond Fund, Enhanced Intermediate Bond Fund, Government Credit Bond Fund, Daily Bond Market Fund and Yield Plus Fund, among other bond mutual funds, to institutional investors, assuring them that the Funds would provide stable, predictable returns in line with a U.S. government and corporate bond index.

Just the opposite happened. Based on our initial investigation, it appears all of the Funds were loaded with subprime debt from home-equity loans, mortgage-backed securities, swaps, derivatives and other exotic products.

Background

State Street's troubles began last summer. At the time, the Funds managed $1.4 billion for institutional clients. Once the subprime crisis took hold, the Funds declined sharply in value. The Limited Duration Bond Fund was especially hard hit, losing 37% of its value during the first three weeks of last August, and 42% for the year. The Daily Bond Market Fund declined 21.5% through August 31, and the Yield Plus Fund fell 7.6% from June through the end of August. Other State Street bond funds took a hit, as well. In total, assets in five of the Funds were down 43% for the year, according to an Oct. 5, 2007, article in the Wall Street Journal.

Collectively, State Street and its subsidiaries manage $2 trillion for pension funds and other institutions. The events of the past year are a clear signal that plan sponsors, investment advisers, trustees and other fiduciaries would be wise to investigate whether their plans, in fact, have investments in any of these Funds and, if so, to take action to protect the beneficiaries.

A unit of Prudential Financial, Inc. has done just that on behalf of accounts held by 28,000 individuals in 165 retirement plans that the firm markets. After learning its clients lost $80 million in the Intermediate Bond Fund and Government Credit Bond, Prudential sued State Street Global Advisors, the manager of the Funds, in October 2007. The suit claims that State Street misrepresented the Funds' investment strategy and exposed clients to undue risk, despite the manager's assertion it would guard against “unpredictable exposure to random events.”

In January 2008, the Houston Police Officers Pension System also filed charges against State Street. The suit claims State Street's Limited Duration Bond Fund failed to make agreed-upon low-risk investments and that 94 percent of the Fund was actually invested in the subprime market.

The Andover Companies, Unisystems and the Memorial Hermann Healthcare System are preparing to do with battle State Street, as well.

The growing number of lawsuits has caused 0fficials in Idaho, Ohio and Alaska — states in which State Street manages money for retirement plans — to question the viability of State Street's internal risk-control processes and consider possible legal action.

As evidence continues to build against State Street, the firm issued a press release on Jan. 3, 2008, announcing it planned to establish a reserve of $618 million, on a pre-tax basis, “to address legal exposure and other costs associated with the underperformance of certain active fixed-income strategies managed by ... the company's investment management arm.”

In the summer of 2007, our group, who individually and collectively have extensive experience in representing investors against Wall Street, formed an affiliation. Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses. Contact us.


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