State Street Must Answer to Nuns

Already facing a number of lawsuits over subprime mortgage investments, State Street Corp. now has to face an order of nuns in court.

The Sisters of Charity of the Blessed Virgin Mary have filed suit against State Street Corp., alleging the Boston-based firm lost more than $1 million of the nuns’ retirement savings by investing in derivatives and subprime mortgages.

According to the Boston Business Journal, in the complaint filed in U.S. District Court for the Southern District of New York, the Sisters claim in the spring of 2005 that State Street promoted investment in the Enhanced Dow Jones-AIG Commodities Futures Strategy, saying it was “a conservative investment strategy” and “remains unleveraged at all times.’

The Sisters agreed to invest in the strategy with assets for the care of retired nuns in the sect. However, the Sisters allege State Street began adding leverage to the funds and invested in non-investment grade assets, including subprime mortgage backed securities and credit default swaps, in late 2006, unbeknownst to the Sisters.

A news report on the case in the Boston Herald says the order has 555 sisters in more than 20 states, but most are retirees who depend on the investment with State Street for retirement income.

The suit seeks damages equal to the amount of money lost in the fund as well as profits that would have been made if the money was invested according to the original strategy.

According to the Herald, Arlene Roberts, a spokeswoman for State Street, said the company is prepared to fight the lawsuit. “We will defend ourselves against inappropriate claims, including those who seek recovery of investment losses that arise solely from changes in market conditions,’ she stated.

Last year, the firm set aside a reserve of $625 million to deal with potential lawsuits involving some of its fixed-income strategies (see “State Street Names New SSgA Chief, Takes $279M Reserve).