The suit by PRIAC, a Prudential Financial subsidiary, was filed in the U.S. District Court for the Southern District of New York in PRIAC’s fiduciary capacity for certain of its defined benefit and defined contribution clients, according to a U.S. Securities and Exchange Commission (SEC) filing. Also named in the filing as a defendant is State Street Bank and Trust Company (State Street).
According to a report in The Wall Street Journal today, Prudential said the losses were suffered in accounts held by 28,000 individuals in 165 retirement plans that it markets.
The SEC filing says the suit seeks restitution of losses attributable to funds using what PRIAC contends were misrepresented money management strategies that “failed to exercise the standard of care of a prudent investment manager.”
The filing did not give details about the alleged misrepresentations.
The report in the Wall Street Journal said that Prudential had placed clients in State Street’s Intermediate Bond Fund and Government Credit Bond Fund, both of which had been marketed as investments that would provide “stable, predictable returns” in line with an index of U.S. government and corporate bonds. However, according to the Wall Street Journal report, Prudential says that State Street changed its investment strategy over the summer without notification and devoted a large portion of the funds’ investments into financial instruments that included “asset-based securities that overwhelmingly derived their value” from home-equity loans, mortgage-backed securities swaps, and derivatives. Further, the report says that SSgA recently informed Prudential it held a position in “a synthetic index whose returns are linked to 20 subprime U.S. mortgage pools.”
The filing said “PRIAC also intends to vigorously pursue any other available remedies against SSgA and State Street in respect of this matter,” but did not elaborate on what other steps it might take.
Prudential is taking an approximately $80 million pre-tax charge against its third-quarter earnings to cover payments to affected plan clients who suffered losses from the SSgA funds and who authorize PRIAC to represent them in the suit, according to the document.
The charge, PRIAC asserted, is “in order to protect the interests of the affected plans and their participants while PRIAC pursues these remedies.”
Hannah Grove, a State Street spokeswoman, told the Wall Street Journal that the company was “extremely disappointed” by Prudential’s actions and that the firm intends “to vigorously defend ourselves. The recent market conditions and lack of liquidity were unprecedented,” she said, according to the paper; “An unfortunate result of such market events is that some funds lost value.”