In addition to an October suit from Prudential Retirement Insurance and Annuity Co. (See PRIAC Accuses SSgA of ‘Misrepresented’ Investment Strategies ), the Boston-based State Street faces lawsuits from New York publisher UniSystems Inc. and Nashua Corp., a Nashua, New Hampshire, paper products company.
The suits allege State Street marketed the affected bond offerings as facing a small amount of risk, but instead actually took imprudently large positions in mortgage-backed securities that ended up causing investors significant losses when the nation’s subprime mortgage market collapsed this summer.
The Nashua suit claims its pension fund lost $5.6 million in State Street’s Bond Market Fund. As of the end of July, the Bond Market Fund “had invested more than 27% of the portfolio in asset-backed securities comprised of home equity loans” in the mortgage industry’s subprime segment, the lawsuit alleges.
In late August, Nashua received a letter from State Street advising it of a more than 12% loss in the fund that month, in a period when an index the fund was supposed to track posted a 1%, the complaint says.
Both lawsuits allege that State Street’s actions represent a fiduciary breach under the Employee Retirement Income Security Act (ERISA).
“State Street represented those bond funds to be conservative investments designed to closely track, and slightly outperform, designated bond market indices,” the UniSystems complaint charged. “In reality, State Street converted the purportedly stable conservative investments into a high-stakes gamble in breach of State Street’s fiduciary duties under ERISA.”
As it has since the controversy began, State Street continued to insist it committed no wrongdoing. Arlene Roberts, a State Street spokeswoman, told the Associated Press that the company is “disappointed that a small number of our active fixed-income clients” have sued.
“We pride ourselves on our commitment to clients, and we believe that we managed these strategies consistent with stated investment objectives. The events in the fixed-income markets over the summer were unprecedented. We intend to defend ourselves against these complaints,” she told the AP.
State Street also contended that the funds at issue in the suits amounted to a small fraction of the $244 billion in fixed-income funds it manages. About $36 billion of that total is actively managed – as opposed to passive funds that track indexes. The proportion exposed to subprime mortgages amounted to $7.8 billion as of June 30, and just $2.6 billion as of September 30, Roberts told the Associated Press. .
In addition to the lawsuits, officials in Idaho and Alaska are following the legal goings-on since their state employee pension funds were invested in enhanced index bond funds offered by State Street – funds buffeted by the recent turmoil in investments tied to subprime mortgages geared toward customers with spotty credit (See State Street Could Face Another Investment Strategies Suit ).
The UniSystems complaint is here .
The Nashua Corp.complaint is here .