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more shoes dropping, As a result of State Street's misconduct, hundreds of millions, if not billions, of dollars have likely been lost through retirement and pension plans that invested in bond funds that were touted as conservative, the bond funds w
State Street Sued Over Bond Fund Losses
Thursday November 1, 12:56 am ET
By Mark Jewell, AP Business Writer
Lawsuits Mount for State Street Over Investment Losses Tied to
BOSTON (AP) -- Institutional money manager State Street Corp. now
faces three lawsuits over its management of bond funds that were
touted for their conservative investment strategies, yet posted losses
over the summer because of risky holdings tied to the subprime
Managers of public employee funds in at least two states that suffered
losses are following the litigation closely but have yet to file their
The latest lawsuit was filed last week in federal court in Boston by
Nashua Corp., a Nashua, N.H.-based maker of paper and imaging
products, against State Street's investment arm, State Street Global
State Street also was named in similar lawsuits filed earlier in
October by Prudential Retirement Insurance and Annuity Co., a manager
of retirement plans, and by New York-based publisher UniSystems Inc.
Nashua lost $5.6 million by investing company pension funds in State
Street's Bond Market Fund, due to the fund's "overexposure in mortgage-
related securities," according to the lawsuit.
Nashua's complaint seeks class-action certification, which could allow
other companies that invested in certain State Street funds to join
"As a result of State Street's misconduct, hundreds of millions, if
not billions, of dollars have likely been lost through retirement and
pension plans that invested in the bond funds," the lawsuit says.
Arlene Roberts, a spokeswoman for Boston-based State Street, said the
company was "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 said.
Nashua's lawsuit seeks unspecified damages and alleges violations of
the Employee Retirement Income Security Act, the federal law governing
retirement plans in private industry.
"State Street held out the bond funds to be actively managed funds
with little investment risk and returns comparable to their respective
benchmark indices," the lawsuit says.
But State Street "significantly deviated from its investment
strategy," the lawsuit says.
For example, as of the end of July, the Bond Market Fund "had invested
more than 27 percent of the portfolio in asset-backed securities
comprised of home equity loans" in the mortgage industry's subprime
segment, the lawsuit says.
In late August, Nashua received a letter from State Street advising it
of a more than 12 percent loss in the fund that month, in a period
when an index the fund was supposed to track posted a 1 percent gain,
the lawsuit says.
Idaho and Alaska are among the states with state employee funds that
were invested in so-called "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.
Alan Winkle, executive director of the Public Employees Retirement
System of Idaho, said Wednesday that his agency was reviewing the
matter "to find out what happened."
Idaho has not pursued litigation over $3 million to $4 million in
losses in a state Unused Sick Leave Benefits Fund that had invested in
State Street's Government/Credit Bond fund, Winkle said.
Michael Barnhill, an attorney in Alaska's Department of Law, said his
state is conducting a review after 1,300 state employees suffered
losses totaling $6.1 million from their elective investments in a
State Street Bond fund offered through a state supplemental annuities
savings plan. Barnhill declined to comment on whether Alaska might sue
State Street over the loss.
State Street says the problematic funds 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
Sept. 30, Roberts said.
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