Facing numerous lawsuits claiming hefty losses over sub-prime mortgage investments, State Street Corp., the largest money manager for institutions, may have to get ready to pay more than the $625 million it set aside for such lawsuits.
Loss estimates have not been released but State Street reported in regulatory filings that asset values adversely affected by the sub-prime mortgage collapse fell from $13.9 billion in June 2007 to $6.1 billion at the end of 2007. State Street says redemptions were the main reason for such a drastic drop. This loss will reflect heavily on investor damages and risk analysts have put damage numbers around $1 billion, which is about 80 percent of State Street’s net income in 2007.
On behalf of 200-plus retirement plans, Prudential Financial Inc. is suing State Street for inappropriately investing their money in risky securities. Besides investor lawsuits, some analysts have even suggested that fund managers may have a fiduciary obligation to sue if the plans were misled into buying something they were not authorized to buy.
The corporate retirement and welfare funds of Unisystems, Nashua Corp and Merrimack Mutual Fire Insurance Co. are seeking class-action status against State Street in the U.S. District Court in Manhattan. They’re claiming State Street breached its fiduciary duty by investing pensioners' money in high-risk securities instead of the conservative funds as promised.
A class-action suit will definitely raise the financial stakes for State Street because class-actions are composed of hundreds or thousands of people and the damage amount will be like a rolling snowball and it would only get bigger.
However, to get class-action status, the funds will need to prove their cases have common facts such as whether they received the same advice. Without class-action status, the pension plans may still sue separately because the size of the claims will justify the cost of litigation.
State Street will also get lawsuits from the public sector.
Currently, State Street is being sued in Houston, Texas over pension-fund loses by the city’s police officers’ pension system, Memorial Hermann Healthcare System in Houston and the Welborn Baptist Foundation in Evansville, Indiana. These suits don’t even include claims being filed under the federal Employee Retirement Income Security Act.
Analysts don’t think State Street will be alone in its troubles though. State Street will certainly get more lawsuits but other companies like Regions Financial Corp.’s Morgan Keegan unit are also under scrutiny.
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