State Street Corp., the Boston-based financial services firm that has made more than $4oo million in settlements and other payments for problems related to its fixed-income funds, is once again in hot water. This time, Massachusetts Secretary of State William Galvin is investigating whether State Street intentionally misled pension funds and other institutional investors about a bond fund that invested in high-risk derivatives, swaps and subprime-mortgage securities.
As reported April 30 by the Boston Globe, the State Street Limited Duration Bond Fund was supposed to be a way for investors to generate better returns than ultra-safe money market funds, but with only slightly more risk. Instead, the fund invested heavily in risky mortgage-related products, which later plummeted in value when the subprime mortgage market collapsed.
Making matters worse: The State Street Limited Duration Bond Fund was highly leveraged, borrowing money as it made continued investments in mortgage-backed securities. Eventually the strategy created even bigger financial losses for the fund.
State Street is the target of several lawsuits by investors who say the company hid the risks associated with the Limited Duration Bond Fund. On April 8, the Sisters of Charity of the Blessed Virgin Mary, based in Dubuque, Iowa, sued State Street, accusing it of putting their money in subprime mortgage products instead of the more conservative investments State Street’s financial advisors initially had promised.
The nuns say they have lost more than $1 million of their retirement fund in the Limited Duration Bond Fund.
The Limited Duration Bond Fund is managed by State Street Global Advisors, State Street’s investment arm.
State Street also is at the center of a 2007 lawsuit filed by Prudential Financial, which claims the firm deceived the insurer by investing in products whose returns were linked to high-risk subprime mortgage pools.
William Hunt, CEO of State Street Global Advisors, abruptly resigned from his post in early 2008, just as the company began to face a slew of investor lawsuits relating to State Street’s subprime losses.