State Street Corp., the largest money manager for institutions, may have to pay more than the $625 million it set aside as a reserve for damages from lawsuits over losses from subprime-mortgage investments made for pension funds. Prudential Financial Inc., the second-largest U.S. life insurer, is suing the Boston-based company on behalf of more than 200 retirement plans. It’s being alleged that State Street inappropriately invested Prudential’s money in risky securities. Three other companies have filed similar actions. State Street reported in regulatory filings that the value of assets “adversely affected” by the collapse in subprime mortgages fell from $13.9 billion on June 30th to $6.1 billion at the end of 2007, a drop of $7.8 billion. It’s been reported that the actual damages in this case may well be greatly in excess of $625 million. Fund managers who are hurt by the drop have an obligation to file suit as the existing plaintiffs have done. If plans were misled into purchasing something they were not authorized to purchase, they have an obligation to sue in order to recover the losses. Since they were misled into making bad investments, the plan managers should be attempting to make the plans whole. The companies involved in this latest suit are Unisystems; Nashua Corp., a maker of print-imaging products in Nashua, New Hampshire; and Merrimack Mutual Fire Insurance Co., based in Andover, Massachusetts.
The New York suits were filed under the federal Employee Retirement Income Security Act (ERISA). Plaintiffs allege that State Street breached its fiduciary duty by investing pensioners’ money in high-risk securities instead of the conservative funds promised. Normally, that kind of accusation is a little easier to prove than fraud, a claim non-pension plaintiffs would have to make. In the securities fraud context, the plaintiff has to prove a fraudulent intent. In this case, however, all you must prove is that the investment is “imprudent.” State Street was also sued over pension-fund losses by the Houston police officers’ pension system, the Memorial Hermann Healthcare System in Houston and the Welborn Baptist Foundation in Evansville, Indiana. However, those cases don’t include ERISA claims. The cases are combined in the U.S. District Court, Southern District of New York (Manhattan).
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