State Street gets sued over retirement-plan losses
State Street Is Sued Over Fund Losses
October 18, 2007; Page C9
A New York publishing company filed a purported class-action lawsuit against State Street Corp. late yesterday over losses in fixed-income funds held in workplace retirement plans.
Unisystems Inc., which filed the suit, alleges that the Boston-based financial-services concern represented its lineup of actively managed bond funds as conservative options but instead invested the funds in "high risk" instruments and mortgage-backed securities.
State Street spokeswoman Hannah Grove said: "We deny any allegation that we didn't correctly communicate the investment objective of the fund."
State Street's investment arm, State Street Global Advisors, manages $2 trillion in assets, mostly for institutional investors. The company says $36 billion of that is in actively managed fixed-income funds.
In the lawsuit, filed in federal court in New York, Unisystems alleges that 25 of its employees had $1.4 million in State Street's Intermediate Bond Fund, an unregistered institutional fund.
The lawsuit alleges that between July 1 and Sept. 1, the fund declined by 25% in value while the index it "purported to track actually increased."
State Street's own documents provided to institutional investors say the objective of the Intermediate Bond Fund is to "match or exceed the return" of the index of U.S. government and corporate bonds.
State Street told institutional investors in a recent report that as of July 31, the Intermediate Bond Fund was leveraged more than 4-to-1 -- meaning the fund borrowed to increase its portfolio to about four times the amount of money clients invested. The footnote says the investments included Treasury futures, options on futures, interest-rate swaps and a complex investment vehicle known as interest-rate "swaptions."
"My client doesn't understand why they would do this when the reason people were in the fund was to have a conservative, predictable investment," said Gerald Silk, a lawyer with Bernstein, Litowitz, Berger & Grossmann LLP, which is representing the purported class-action.
Earlier this month, a unit of Prudential Financial Inc. sued State Street over $80 million in losses that 165 retirement plans it manages suffered in State Street fixed-income funds -- one of them the same fund Unisystems is suing over. Prudential says State Street didn't disclose that the money was in "highly leveraged" investments. Attorneys general in Alaska and Idaho are also looking into possible legal action against the company over losses in state retirement funds.
In recent years, State Street changed strategies in some funds in its fixed-income division to find more attractive yields, according to a letter sent to institutional investors in August. And in its most recent annual report, the company explained that its average portfolio included fewer plain vanilla government bonds, and more "collateralized mortgage-backed securities" and asset-backed securities than a year earlier. The Intermediate Bond Fund had 25% of its portfolio in asset-backed securities, according to the report to clients.
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posted by Victor Lloyd Smith @ 11:08 AM
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