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Bond Troubles Continue To Dog State Street

Troubles over the management of bond funds tied to the subprime mortgage industry continue to plague State Street, the Boston-based financial services giant.

State Street's problems stem from when it 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 as safe and conservative investments.

It turns out the Funds were anything but safe.

Last summer, the Funds managed $1.4 billion for institutional clients. When the subprime mortgage crisis heated up, the Funds saw a sharp decline in value. The Limited Duration Bond Fund was hit particularly hard, losing 37% of its value during the first three weeks of August. In all, assets in five of the Funds were down 43% for the year, according to an Oct. 5, 2007, Wall Street Journal article.

These events have given several plan sponsors, investment advisers, trustees and other fiduciaries reason to consider or initiate legal action against State Street. Among them:

  • 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 State Street misrepresented the Funds' investment strategy, exposing clients to undue risk, despite assurances it would guard against “unpredictable exposure to random events.” Prudential's clients lost $80 million in State Street's Intermediate Bond Fund and Government Credit Bond.

  • The Houston Police Officers Pension System filed charges against State Street in January 2008, alleging that 94 percent of State Street's Limited Duration Bond Fund was actually invested in the subprime market, rather than agreed-upon low- risk investments.

  • The Memorial Hermann Healthcare System, Unisystems and the Andover Companies are filing legal actions against State Street.

  • 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.

For its part, only recently did State Street acknowledge the extent of problems in its house. In a press release dated Jan. 3, 2008, the company 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.”

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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