Probe Of State Street Focuses On Misrepresentation Of Bond Fund To Institutional Investors
State Street Corp.’s reputation continues to be called into question. This time, accusations of misrepresentation and negligence are coming from Massachusetts Secretary of State William Galvin, who is investigating the Boston-based financial services firm on claims it hid the risks of certain bond funds from pension fund clients.
Galvin confirmed last week his office has opened a probe of State Street and the State Street Limited Duration Bond Fund. In a story appearing April 30 in Investment News, it was reported that the fund is among several fixed-income strategies managed by State Street’s investment unit, State Street Global Advisors, to lose substantial amounts of money because of exposure to the subprime mortgage market.
Pension funds and other institutional investors initially invested in the Street Limited Duration Bond Fund as an “enhanced cash fund,” with the idea to generate better returns than ultra-safe, conservative money market funds with just slightly more risk. Investors now say the Limited Duration Bond Fund took on large positions of high-risk mortgage-related assets, a move that ultimately proved devastating for investors.
When the subprime mortgage market went south, bond funds like the Limited Duration responded by plummeting in value.
More than a year ago, several lawsuits were filed against State Street over charges the firm misrepresented the risks of various bond funds, including the Limited Duration Fund. Perhaps anticipating a legal outcome in favor of investors, State Street subsequently set up a reserve fund containing millions of dollars to cover possible future payouts. Now facing additional investigations, State Street may need to infuse even more funds into that reserve.
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.
