State Street Continues To Take Heat
State Street, the Boston-based financial services giant, continues to make news over its management of bond funds tied to the subprime mortgage industry.
In the past year, State Street marketed a number of bond mutual funds – including the Limited Duration Bond Fund, Intermediate Bond Fund, Enhanced Intermediate Bond Fund, Government Credit Bond Fund, Daily Bond Market Fund and Yield Plus Fund – to institutional investors, assuring them that the Funds would provide stable, predictable returns in line with a U.S. government and corporate bond index. Â
Investors soon discovered that “safe†turned out to be anything but that.Â
State Street’s problems first unfolded last summer. Back then, the Funds managed $1.4 billion for institutional clients. When the subprime mortgage crisis started to heat up, the Funds declined sharply in value. The Limited Duration Bond Fund, which lost 37% of its value during the first three weeks of last August, and 42% for the year, was hit especially hard. 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.
In turn, these events have caused a number of plan sponsors, investment advisers, trustees and other fiduciaries investors to take legal action against State Street. A unit of Prudential Financial, Inc., on behalf of accounts held by 28,000 individuals in 165 retirement plans that the firm markets, sued State Street Global Advisors, the manager of the Funds, in October 2007. The suit charges that clients lost $80 million in State Street’s Intermediate Bond Fund and Government Credit Bond and were exposed to undue risk, despite assurances it would guard against “unpredictable exposure to random events.â€Â
The Houston Police Officers Pension System also filed charges against State Street in January, alleging that 94 percent of State Street’s Limited Duration Bond Fund was actually invested in the subprime market, rather than the agreed-upon low-risk investments.
Unisystems, the Andover Companies and the Memorial Hermann Healthcare System are filing legal actions against State Street, as well.
Based of the growing number of lawsuits coming to light, officials in states where State Street manages retirement funds have openly questioned the company’s internal risk-control processes. Three states – Alaska, Idaho and Ohio – may consider future legal action.Â
As for State Street, the company only recently acknowledged the extent of its problems. In a press release dated Jan. 3, 2008, State Street said it was establishing 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.â€
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.
