Archive for the “State Street Bond Funds” Category

Preliminary results of the government’s stress tests on the fiscal soundness of the nation’s biggest banks indicate that State Street Corp., the world’s largest money manager for institutions, does not have a need to raise billions of dollars in additional capital should the economy worsen. That’s good news in light of the fact the Boston-based company faces a slew of lawsuits from pension funds, institutional investors and others over claims State Street intentionally hid the risks of certain bond funds.

Earlier this month, Massachusetts Secretary of State William Galvin confirmed that his office had opened an investigation into State Street and its Limited Duration Bond Fund. At issue is the fact pension funds and other institutional investors invested in the 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. As it turns out, the Limited Duration Bond Fund held large concentrations of risky mortgage-backed assets.

When the subprime mortgage crisis unfolded in the summer of 2007, funds like the State Street Limited Duration Bond Fund took a huge hit, as did investors who suffered millions of dollars in losses.

The State Street Limited Duration Bond Fund is managed by State Street Global Advisors, State Street’s investment arm.

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. 

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.

One of the world’s biggest institutional managers has found itself in the middle of an investigation by Massachusetts securities regulator William Galvin. The Wall Street Journal first reported that Boston-based State Street Corp. was being targeted by Galvin over whether the firm intentionally misled pension funds and institutional investors about the risks of certain bond funds. 

Galvin’s probe apparently is zeroing in on State Street’s enhanced index bond funds, which include the State Street Limited Duration Bond Fund. According to the April 30 Journal article, the fund was marketed to pension funds, retirement plans and other investors as a safe, conservative bond fund when in actuality it held high-risk securities such as derivatives, swaps, and mortgage-backed assets.

This isn’t the first time State Street’s Limited Duration Bond has been at the center of state and federal investigations. Several investors previously sued State Street after suffering losses because of what they say was deception and gross negligence of State Street management to invest fixed-income funds in high-risk mortgage-backed securities. 

In January 2008, State Street set aside more than $600 million to settle legal claims over losses and other issues associated with its bond funds. If Galvin’s investigation turns up evidence proving State Street deceived pension funds and institutional investors, that amount could be just the beginning.

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.

Massachusetts Secretary of State William Galvin has launched an investigation into State Street Corp. and whether the Boston-based firm portrayed a bond fund that invested in high-risk derivatives, swaps and subprime-mortgage securities as a low-risk, conservative investment to pension funds and retirement plans.

The center of Galvin’s investigation is an enhanced index bond fund known as the State Street Limited Duration Bond Fund. The fund itself was supposedly created as a way for pension funds and other institutional investors to generate better returns than ultra-safe money market funds, but with only slightly more risk. Instead, it turns out the fund invested heavily in risky mortgage-related products - products that ultimately plummeted in value following the collapse of the subprime market.

In addition, the bond fund was highly leveraged, borrowing money to make bigger bets on mortgage-backed securities. The strategy ultimately caused more financial losses.

According to an April 30 article in the Wall Street Journal, Massachusetts’ Galvin wants to know if State Street marketed and sold the Limited Duration Bond Fund as a “safe” investment to pension funds despite the fact it held risky instruments considered inappropriate for that sector of investors.

Inappropriate bets on subprime mortgages have plagued State Street’s enhanced index funds for some time now, making the company the focus of several lawsuits. On April 8, the Sisters of Charity of the Blessed Virgin Mary, based in Dubuque, Iowa, sued State Street, charging it of putting their money in risky subprime mortgages instead of the more conservative investments State Street’s financial advisors had promised.

The nuns say they have lost more than $1 million.

In a document that State Street apparently gave clients on another enhanced bond index fund, the Government/Corporate Bond Fund, investments are described as those in a “broad-based, investment-grade fixed-income universe.” As of March 31, 2007, however, the fund had nearly half of its weighting in mortgage-backed securities and other risky asset-backed products, according to the Wall Street Journal.

By comparison, the same fund’s biggest weighting in September 2005 was in U.S. Treasurys, while mortgage- and asset-backed securities accounted for less than 6% of the fund’s top 10 holdings, according to the Wall Street Journal.

State Street also is at the center of a 2007 lawsuit filed by Prudential Financial, which claims the firm deceived the insurer by investing in products whose returns were linked to 20 high-risk subprime mortgage pools.

In early 2008, State Street replaced William Hunt, CEO of State Street Global Advisors, amid growing controversy of the company’s ties to subprime mortgages and other toxic financial products.

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.

The year of 2008 will likely be remembered as the year subprime mortgages and corporate scandals changed the face of Wall Street. Buried under the weight of the subprime crisis, financial institutions took nearly $800 billion in writedowns and losses. The value of stocks worldwide plummeted by more than $30 trillion. Goliath investment houses like Bear Stearns fell apart. State, municipal and corporate pension funds reported massive losses from investments tied to faulty valuation models and high-risk mortgage-backed securities and their derivative spin-offs, collateralized debt obligations (CDOs).

Then there’s the near financial collapse of mortgage giants Fannie Mae and Freddie Mac and American Insurance Group (AIG), which required a financial intervention courtesy of the U.S. government. Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection in 2008. Washington Mutual and IndyMac, along with some 20 other banks were forced to close their doors. Government bailouts reached an astronomical $9 trillion. And as a final nod to 2008, investors lost some $50 billion in a Ponzi scheme orchestrated by the former Nasdaq chairman, Bernard (Bernie) Madoff.

For investors, 2008 is the year that went from bad to worse. It began with the collapse of the auction-rate securities market in February and continued with credit default swaps and structured investment products. For the first time since the 1930s, the Dow Jones Industrial Average experienced losses of more than 30%, closing the year at 8,776.39. By comparison, the Dow finished out 2007 at 13,264.82. Bank stocks in particular took a beating in 2008, with Bank of America and Citigroup losing nearly 70% of their value. As for shareholders, they saw about $7 trillion of their wealth wiped out.

In the world of ultra-short bond funds, 2008 provided the lesson that ultra short does not translate to “ultra safe.” A number of supposedly safe and conservative ultra-short funds got into trouble in 2008 by investing in risky mortgage-backed securities and collateralized mortgage obligations (CMOs). When losses in those toxic assets began to skyrocket, investors lined up to pull their money out in droves, sparking a wave of fund redemptions.

As a result, several fund managers were forced to liquidate their funds’ assets. State Street Global Advisors’ SSgA Yield Plus Fund began liquidating in May after the fund fell 19%. It turns out more than 50% of the fund’s assets were tied to mortgage-related securities funds. One month later, the Evergreen Ultra-Short Opportunities Fund liquidated, as well, when its assets plunged more than 20% in value. Finally, there is Charles Schwab’s YieldPlus Fund. Marketed to investors as a safe alternative to cash, the fund suffered the most losses of any ultra-short bond fund in 2008, losing more than 40% of its value.

Investors, meanwhile, are suing all three funds, charging that they investments were represented as conservative “cash alternatives” and similar to money-market funds. Far from safe or conservative, the funds were heavily concentrated in risky mortgage and asset-backed securities. And, in the case of Schwab’s YieldPlus Fund, several investors who have filed lawsuits claim various Schwab executives and fund manager Kimon Daifotis committed “acts of gross misconduct” by encouraging investors to hold on to their YieldPlus shares, while simultaneously dumping millions of YieldPlus shares from the portfolios of Schwab’s other mutual funds.

Capping out 2008, of course, is the Bernie Madoff scandal. The disgraced hedge fund manager was arrested Dec. 11 by federal agents on charges of securities fraud for scamming $50 billion from investors. Meanwhile, the Securities and Exchange Commission (SEC), the supposed protector of investors and their investments, apparently turned a blind eye to Madoff’s subterfuge over the years by ignoring red flags that signaled problems with his funds and their “too-good-to-be-true” returns.

For investors, the Madoff affair may well be the final nail in the coffin when it comes to confidence in Wall Street. Already shaken from a year that was punctuated by the subprime crisis and corporate scandals - including the implosion of Bear Stearns, the collapse of the auction rate securities market, the bankruptcy of Lehman Brothers and inept accounting practices by Fannie Mae and Freddie Mac and other institutions - Wall Street has its work cut out in 2009 as it tries to renew investors’ faith once again.

Our affiliation of securities 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. 

If you put your cash in ultra-short-duration bond funds over the last year, the results may not turn out as you hoped.

The typical ultra-short bond fund is off 1.66 percent over the last year, with the year-to-date average dropping nearly 2.2 percent. For a few ultra-short funds, the situation looks even darker: Fidelity Ultra-Short Bond (FUSFX) fell 12.8 percent, Schwab YieldPlus (SWYPX) plummeted 28 percent, and SSgA Yield Plus (SSYPX) took a nosedive down 30 percent of its value.

How could these assumed “safe” funds turn into such poor investments?

Look no further than the subprime credit crisis. Subprime, asset-backed securities often make up a large part of an ultra-short fund, so when the housing market collapsed, ultra-short fund values sank too. Investors then rushed to sell their funds, dragging prices down even more. Managers had to fulfill redemption requests and swallow the losses; they couldn’t wait it out, hoping that in a few months the fund would mature and recover.

Prior to the credit crisis, these subprime, asset-backed securities regularly received appropriate ratings from relevant agencies. Many fund managers assumed they were safe enough to include in ultra-short and other risk-averse funds, with the added benefit of additional returns.Now investors in ultra-short-duration bond funds face two choices:

1) If fund managers can hang onto securities, investors can hope their fund avoids default or foreclosure and eventually recovers.

2) In the more likely scenario, other shareholders will dump their shares and leave the hopeful ones to deal with the consequences.

Then again, in a third scenario, the fund company might just bail out, as State Street Global Advisors did when they announced plans to liquidate SSgA Yield Plus. No matter how ugly the choices, investors need to take a close and urgent look at their investments.

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.Â

Bond funds, once a pillar of strength and stability in times of market upheaval, appear to be showing signs of trouble.

Even though the Lehman Brothers U.S. Aggregate bond index, which tracks taxable bonds, Treasury notes, corporate and some mortgage securities, is up 2.3 percent as of April 4, 20 percent of all investment-grade U.S. taxable bond funds are in the red.

As reported April 8, 2008, by Shefali Anand in the Wall Street Journal, bond funds that had substantial investments in mortgage securities are the funds most likely to be in hot water. The Regions Morgan Keegan Select Intermediate Bond Fund was down 44 percent since the beginning of the year; the State Street Global Advisors Yield Plus and Schwab YieldPlus funds fell 18 percent and 23 percent, respectively, since the start of 2008.

Other bond funds are suffering from a massive sell-off of mortgage securities related to the subprime crisis. Among them: Metropolitan West Strategic Income Fund, down 8 percent this quarter; UBS Absolute Return Bond, down nearly 15 percent over the past year; and the Principal Investors’

Ultra Short Bond fund, down nearly 7 percent this quarter.

Metropolitan West alone had more than half of its investments in mortgage securities and other asset-backed products as of Dec. 31, 2007.

As the Wall Street Journal article points out, this has been an atypical time for bond markets. And, in some instances, investors may be well served to hold on to their bond investments for the long-term. On the other hand, investors may be in a Catch 22 situation in that it’s become increasingly difficult to determine if a bond fund is really safe and if its investments are in mortgage securities or other asset-backed products.

Moreover, the average credit quality of a bond fund may not correspond to its true risks. The State Street Global Advisors Yield Plus and the Schwab Yield Plus funds showed average credit ratings of double-A or higher on recent disclosures, yet both recorded significant losses in the past year.

In the end, investors who are looking for “safe” investments may find themselves turning to old faithful - the tried and trusted investments of bank savings accounts or money-market funds.

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.

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

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.”

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.

As a $2 trillion caretaker of pension fund and other institutional investors, State Street Corporation oversees the retirement funds of countless American workers. Five pension-fund clients have sued State Street Corporation, claiming tens of millions in unwarranted losses. The State Street funds were supposed to consist of risk-free debt such as U.S. Treasuries, but (here we go again) were found to be full of mortgage-related securities that lost 28% of their value over the summer.Â

When we see the pensions funds of hardworking Americans hit by the subprime mortgage fiasco, we start to feel like securities lawyers on steroids. We want to hit back, with all we’ve got.Â

The firm has set aside $618 million to settle the five legal claims filed against it. Could be the tip of the iceberg.

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.Â