State Street Corporation, the country’s largest money manager for institutions, is in hot water with its investors. More than 200 retirement plans have brought suit against the money giant. Bloomberg has reported that the damages are expected to exceed the $625 million originally set aside for that purpose. The Bloomberg story sources place the damages at over $1 billion, and the rumor mill sets the damages at many billions.
The Plaintiffs’ attorney maintains that State Street breached its “fiduciary duty” to investors. State Street will no doubt play the investments-carry-inherent-risk card. Angry investors say that the investments were marketed to them as low risk — akin to a money market fund when they were actually highly leveraged mortgage-backed securities. It comes down to a marketing question. Were the investments packaged such that the packaging didn’t jive with the contents inside the box?
The fact that State Street has set aside $625 million to cover damages shows that the company expects significant exposure. The Plaintiffs’ attorney is claiming that a “prudent expert” … well, should have known … well, to the extent that they had knowledge.
The end result is that the ratings agencies need to do a better job. Investors need to do a better job. And State Street … well, everyone could have done better. Yet here we are, and it will be interesting to see how things play out.
Wade Young is a Denver mortgage broker.
The Bloomberg story says that State Street’s asset values fell from $13.9 billion to $7.8 billion. No way you can get that kind of fall if the investments are conservative.
1. Investments, by their very nature, can go up or down.
2. Fraud is knowingly decieving by manipulating the numbers. Did State Street do this?
3. When people were cashing out during the build up of the RE bubble every one whispered there was a problem but as long as the money kept coming in people kept jumping on board. Now that money has been lost ethics are important again.
At least where it concerns that particular person’s money.
If they were marketing the securities to ‘prudent experts’ (State Street’s term) then they should have been selling to accredited investors only, meaning certain institutions, well-funded trusts, or individuals with income => 200k or net worth => $1 mill. Your average investor could never be characterized as prudent or expert.
Pensions fund managers are experts and if the nature of the investments was disclosed then they are the ones in hot water because they are accountable to their (non-accredited) investors. If the disclosure was in fact made then these guys would appear to be attempting to deflect blame that belongs to them. It hinges on what information they were given.
My understanding is that Plaintiffs claim that State Street should have known better — that a “prudent expert” should have known better (the “prudent expert” being State Street). Also, I don’t think the complaint is fraud; I think it’s breach of fiduciary duty.
I don’t know. If State Street was managing the pension funds then they have a fiduciary duty. Otherwise the fund managers do because they are presumed experts and responsible to their own investors. I’m an accredited investor and that means I have no one to blame for my decisions but myself. In exchange for taking on the added responsibility I get access to investments not available to the general public — riskier but with potentially higher returns.
This is starting to look like everything else associated with the mortgage mess — risk being obscured and passed along to someone else, who changes it up and passes it on again until no one knows what they are buying. But if legal disclosures were made I can’t see how a professional fund manager and presumed expert can dump his or her responsibility onto the purveyor of an investment. Greed and stupidity are apparently not limited to “amateur” investors.
They allegedly knew that the investments were risky but marketed them as low risk. That’s why they are in a jam. If you know that something is a lemon but you advertise it as an orange, it can be considered a breach of fiduciary duty because the information in front of you suggested that the item was indeed a lemon and that a prudent person would have known it was a lemon.
I never know about these cases. If State Street knew they were bad investments they it would seem they are guilty of fraud. If they were just stupid I dont think you can sue for that. It seems a lot of institutions thought these investments were safe. It will be interesting to see what evidence comes up in the case. You might get a few internal emails indicating people knew bad stuff was coming down the pike.