Compliance November 5, 2007

Class Action Filed Against State Street

Another pension fund has filed suit against State Street for “investing purportedly conservative, risk-averse bond funds in high risk mortgage backed securities and exotic financial instruments.″
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The law firms Keller Rohrback L.L.P. and Bernstein Litowitz Berger & Grossman have announced the filing of a class action lawsuit against State Street Bank & Trust Company and State Street Global Advisors on behalf of The Andover Companies Employee Savings and Profit Sharing Plan. The action follows an earlier investigation announcement from Keller Rohrback (see Keller Rohrback Announces ERISA Investigation Concerning SSgA Bond Funds).

According to a press release, the suit “…seeks to recover the losses State Street caused to Plaintiff, and to ERISA retirement plans throughout the country by investing purportedly conservative, risk-averse bond funds in high risk mortgage backed securities and exotic financial instruments. Certain bond funds managed by State Street increased their holdings of mortgage-backed securities from just 8% in September 2006 to 25% in March 2007, despite the fact that the indices those funds were supposed to track are comprised 60% of Government bonds, with the remainder comprised largely of Corporate bonds.”

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Borrowed Money?

The press release goes on to allege that “State Street highly leveraged those investments by purchasing mortgage-backed securities using borrowed money, thus compounding the risk to investors. As a result of those imprudent investments, bond funds managed by State Street — which were supposed to track a well-defined index of investment-grade U.S. Government and Corporate bonds — lost up to 40% of their value when the market for mortgage-backed securities collapsed in August 2007.’

As the Investment Manager for the bond funds, the action seeks to hold State Street liable under the Employee Retirement Income Security Act of 1974 (ERISA) for the losses caused by its imprudent management of those funds. The most recent complaint asserts that State Street breached its fiduciary duties under ERISA, and seeks to recover losses to ERISA plans caused by State Street’s actions. The claim is asserted on behalf of all ERISA plans, and the participants therein, that were invested in bond funds managed by State Street between January and October 2007.

The suit is the latest in a series of legal actions, beginning with an October suit from Prudential Retirement Insurance and Annuity Co. (See Prudential Accuses SSgA of “Misrepresented’ Investment Strategies). The Boston-based State Street now also faces lawsuits from New York publisher UniSystems Inc. and Nashua Corp., a Nashua, New Hampshire, paper products company (see State Street Faces Two More Lawsuits Over Bond Fund Losses). 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.

A copy of the complaint can be found at http://www.blbglaw.com or http://www.erisafraud.com.

IMHO November 3, 2007

IMHO: Theories of Relativity

I was having coffee with a buddy of mine a couple of weeks back, and before long the discussion turned to music; specifically the new Bruce Springsteen CD.
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Suffice it to say that he had just acquired it, and was enjoying it immensely. As it turned out, I had had a chance to listen to the album (yes, I’m old enough to still refer to them as albums) online – and had ordered it. I had not, however, received it in the mail yet.
My friend – who had picked up his copy at a Starbucks – hesitated – then asked me how much I paid. I then told him (about $10) – and, almost as a courtesy (after all, money had already changed hands) asked how much he had paid.
Well, I never did find out – though it was pretty clear he paid more than I did. In fact, I’ve seen the prices that Starbucks charges on the few CDs they stock there, and it may well have been a LOT more.
Now, I’m sure the Bruce Springsteen album that was delivered to my house (that very afternoon, as it turned out) was identical in every pertinent respect with the one my friend picked up along with his morning coffee a couple of days earlier. On the other hand, he had it in his hands immediately without making a special trip. Forty-eight hours earlier that probably seemed like a good bargain – but one that clearly lost some of its luster the closer mine came to delivery. In short, his comfort with the bargain he’d struck was clearly relative to my experience.
Things aren’t usually that clear cut with retirement plans, unfortunately. Every 401(k) plan is just a little bit different, and some quite a bit so. Every employer brings a different level of commitment to the process, as does every adviser – and the workforce that such programs are offered to surely represent a mosaic of difference as diverse as America herself. There is no such thing as a “typical’ 401(k), and – much to the discomfiture of some – there is no such thing as a single reasonable amount to pay for the services that would ostensibly be provided to that 401(k).
Yet for all the buzz around the issue of reasonable fees, it ranked sixth on the list of criteria in selecting a provider in PLANSPONSOR’s 2007 Defined Contribution Survey – just behind variety of investment options. Still, in evaluating participant services, “fees for participant services’ was the lowest ranked element – and “fairness of fees’ and “fee disclosure’ were the most problematic elements of plan sponsor service rankings. Today most plan sponsors feel that they are paying reasonable fees – but there are growing concerns that they aren’t. Concerns that are almost certainly fueled by the growing attentions of the Department of Labor, Congress, and the plaintiff’s bar to that very issue.
Sooner or later, like that Springsteen album, people are going to have a chance to realize that they are perhaps paying very different fees for what may well be, in every pertinent respect, identical services. And that’s, IMHO, going to make for some very unsatisfied customers.

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