The suit by PRIAC, a Prudential Financial subsidiary, was filed in the U.S. District Court for the Southern District of New York in PRIAC’s fiduciary capacity for certain of its defined benefit and defined contribution clients, according to a U.S. Securities and Exchange Commission (SEC) filing. Also named in the filing as a defendant is State Street Bank and Trust Company (State Street).
The SEC filing says the suit seeks restitution of losses attributable to funds using what PRIAC contends were misrepresented money management strategies that “failed to exercise the standard of care of a prudent investment manager.”
The filing did not give details about the alleged misrepresentations.
The filing said “PRIAC also intends to vigorously pursue any other available remedies against SSgA and State Street in respect of this matter,” but did not elaborate on what other steps it might take.
Prudential is taking an approximately $80 million pre-tax charge against its third-quarter earnings to cover payments to affected plan clients who suffered losses from the SSgA funds and who authorize PRIAC to represent them in the suit, according to the document.
The charge, PRIAC asserted, is “in order to protect the interests of the affected plans and their participants while PRIAC pursues these remedies.”
The Wall Street Journal reports that Prudential said the losses were suffered in accounts held by 28,000 individuals in 165 retirement plans that it markets. Prudential said it had placed its clients in two State Street funds, the Intermediate Bond Fund and the Government Credit Bond Fund, that SSgA had marketed as investments that would provide “stable, predictable returns” in line with an index of U.S. government and corporate bonds, according to the WSJ. Prudential claims State Street changed its investment strategy over the summer without notification and devoted a large portion of the funds’ investments to financial instruments that included “asset-based securities that overwhelmingly derived their value” from home-equity loans, mortgage-backed securities swaps, and derivatives, according to the WSJ, and that SSgA recently informed Prudential it held a position in “a synthetic index whose returns are linked to 20 subprime U.S. mortgage pools.”
Hannah Grove, aState Street spokeswoman, told the Journal the company was “extremely disappointed” by Prudential’s actions and “we intend to vigorously defend ourselves. The recent market conditions and lack of liquidity were unprecedented,” she said, according to the report. “An unfortunate result of such market events is that some funds lost value.”