State Street Sued over Mortgage-Backed Investments

A Massachusetts plumbing and air conditioning supply company sued State Street over allegations it misrepresented a bond fund ultimately invested in mortgage-backed securities as a low-risk 401(k) investment option.

F.W. Webb Company filed the suit against State Street Bank and Trust Company, State Street Global Advisors (SSgA), and CitiStreet over what Webb charged were the SSgA Yield Plus Fund’s ultimate losses because of it holdings in sub-par mortgage-backed securities. The suit was filed by Boston lawyer David E. Lurie.

Even though the investment option was repeatedly represented to Webb as being like a money market portfolio, only with better returns, starting in 1996, Webb alleged State Street changed the investment strategy for the Yield Plus account to emphasize riskier lower-quality securities.

“Defendants exposed the Yield Plus Fund to investments in low-quality debt securities, creating an inappropriate level of risk far out of line with the stated investment objectives of the F.W. Webb 401k Plan and those of a traditional money market fund,” the suit alleged.

According to the suit, the Yield Plus Fund, contrary to its purportedly conservative investment strategy, fell dramatically because of its overexposure to risky, low-quality assets and securities in mid-2007. The Board of Directors for the SSga Yield Plus Fund decided to liquidate the fund as of May 31.

CitiStreet Involvement

The suit names CitiStreet as a defendant because since 2000 it provided F.W. Webb with the investment management and recordkeeping/administrative functions previously provided by State Street Bank and SSgA.

“That stability of the Yield Plus Fund might not have a stable value was never discussed at these meetings (with State Street and CitiStreet),” the suit alleged. “Believing that the Yield Plus Fund continued to have the stability of a money market fund and was a relatively risk-free investment for its participants, and based on its satisfactory performance over time, Plaintiffs had no reason to question the advisability of inclusion of the Yield Plus Fund in the F.W. Webb 401(k) Plan.”

The suit alleged the decision to change the Yield Plus fund to move it into mortgage-backed securities was at a particularly bad time in the housing market.

“To make matters worse, during the 2005-2007 timeframe, SSgA—in violation of its fiduciary duties and with wanton disregard for the interests of the F.W. Webb 401(k) Plan participants— chose to invest the Yield Plus Fund heavily in risky financial instruments such as low-quality, mortgage-backed bonds supported by subprime home loans and other illiquid asset-backed securities,” the suit claimed. “These high-risk, low quality investments directly exposed the Yield Plus Fund to the volatility of the subprime mortgage market at the time when it was publicly reported that defaults of subprime mortgages were skyrocketing, and that numerous subprime lenders were facing insolvency.”

The F.W. Webb 401(k) Plan had 1,281 participants as of year-end 2006, with about $100 million in assets.

State Street has been slapped with a number of suits its funds later invested into mortgage-backed securities (see SSgA Hit with Two More Subprime Suits).

The Webb suit is available here.