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.″

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.”

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 or