State Street, the Boston-based financial services giant, marketed its Limited Duration Bond Fund, Intermediate Bond Fund, Enhanced Intermediate Bond Fund, Government Credit Bond Fund, Daily Bond Market Fund and Yield Plus Fund, among other bond mutual funds, as safe, conservative investments and sold them to institutional investors seeking high quality and low risk investments. Much to the chagrin of pension plans, non-profit organizations and other institutional investors, who relied on these representations, these Funds have proven to be just the opposite. Indeed, investigations have revealed that they are anything but safe.
State Street assured investors that the Funds would provide stable, predictable returns in line with a U.S. government and corporate bond index, and touted the Limited Duration Bond Fund “as a way to generate better results than those of money-market funds with only slightly more risk.” In reality, however, upon our initial investigation, all the Funds appear to have been loaded with subprime debt from home-equity loans, mortgage-backed securities, swaps, derivatives and other exotic products.
Last summer, as the subprime crisis escalated, the Funds declined sharply in value. The Limited Duration Bond Fund, which at the time managed $1.4 billion for institutional clients, was especially hard hit, losing 37% of its value during the first three weeks of last August, and 42% for the year by August 21. The Daily Bond Market Fund declined 21.5% through August 31, and the Yield Plus Fund fell 7.6% from June through the end of August. Other State Street Bond Funds sustained losses as well. According to an October 5, 2007 article by Jennifer Levitz in the Wall Street Journal, assets in five of the Funds were down 43% for the year.
Plan sponsors, investment advisers, trustees and other fiduciaries are urged to investigate whether their plans have investments in any of these Funds and to take action to protect the beneficiaries.
A unit of Prudential Financial, Inc. — on behalf of accounts held by 28,000 individuals in 165 retirement plans that the firm markets — has already taken action. After discovering that its clients lost $80 million in the Intermediate Bond Fund and Government Credit Bond, Prudential sued State Street Global Advisors, the manager of the Funds, in October 2007. Prudential alleged that State Street misrepresented the Funds’ investment strategy and, despite the manager’s assertion that it would guard against “unpredictable exposure to random events,” exposed its clients to undue risk.
After an analysis of the Limited Duration Bond Fund revealed that 94% of its holdings was invested in undisclosed positions in subprime, mortgage-related financial derivatives and that the Fund was heavily leveraged by using interest rate swaps and ABX index swaps, in January 2008, the Houston Police Officers Pension System likewise filed suit against State Street. The suit alleges violations of the fiduciary provisions of the Employment Retirement Income Security Act (“ERISA”), among other claims.
Unisystems, the Andover Companies and the Memorial Hermann Healthcare System have also filed actions against State Street. In light of the losses in the State Street Funds, officials in Alaska, Idaho and Ohio are also questioning the viability of State Street’s internal risk-control processes and investigating whether to pursue legal action. State Street manages money for retirement plans in these states. Collectively, State Street and its subsidiaries manage $2 trillion for pension funds and other institutions.
In light of the mounting evidence against the firm and the growing number of lawsuits, State Street has acknowledged that it has problems. In a January 3, 2008 press release, State Street announced that it would be 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.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in counseling investors regarding their subprime investment problems and have brought claims for investors with losses relating to subprimes. For further information, please contact us.