State Street, Pension Plans Reach $90M Settlement

By Nick Brown

Law360, New York (September 21, 2009) -- A class of plaintiffs in a multidistrict litigation accusing State Street Bank & Trust Co. of mismanaging hundreds of millions of dollars in retirement plans has proposed a preliminary settlement of $89.75 million.

The plaintiffs — managers of retirement plans for insurance and publishing companies — submitted a settlement proposal Friday in the U.S. District Court for the Southern District of New York that would recover about 58 percent of the losses caused by State Street's alleged mismanagement.

According to the plaintiffs, State Street took high-stakes gambles by converting conservative, risk-averse bond funds into high-risk mortgage-backed securities, despite reports of rising defaults in subprime mortgages and lenders facing insolvency.

The funds lost hundreds of millions of dollars as a result of the subsequent subprime mortgage meltdown, according to a consolidated amended complaint filed in 2008.

The actions represented a breach of the bank's fiduciary duty the plaintiffs in violation of the Employee Retirement Income Security Act of 1974, the complaint contends.

Certain bond funds managed by State Street increased their holdings of mortgage-backed securities from 8 percent in September 2006 to 25 percent in March 2007, according to the complaint.

That investment was contrary to the indices that those funds were supposed to track, which consisted of 60 percent of government bonds and the remainder largely of corporate bonds, the plaintiffs say.

In addition, State Street highly leveraged those investments by purchasing mortgage-backed securities using borrowed money, thus compounding the risk to investors, the complaint argues.

Some of the bonds lost as much as 42 percent of their value in 2007, “while the indices they purported to track actually increased,” it said.

Plaintiffs include managers of retirement plans for Massachusetts-based Merrimack Mutual Fire Insurance Co. and mutual insurance firm the Andover Cos., as well as New York state-based publishing company Unisystems Inc.

The proposed settlement includes a stipulation allowing Boston-based State Street to terminate the settlement if opt-outs surpass a certain threshold.

State Street has also agreed to increase the settlement amount if the bank reaches separate agreements with any opt-out plaintiffs, according to the motion.

Both parties would drop, with prejudice, all claims against one another, the proposal states.

The plaintiffs cited State Street's 2008 8-K form acknowledging that portfolio managers “materially increased the exposure of these strategies to securities backed by subprime mortgages.”

The underperformance of the investments “caused a number of our customers to question whether the execution of these strategies was consistent with their investment intent,” the bank said.

Lawyers for the lead plaintiffs in the case declined to comment Monday.

Attorneys for State Street did not immediately return requests for comment.

The plaintiffs are represented by Bernstein Litowitz Berger & Grossmann LLP, Keller Rohrback LLP, and Berman DeValerio.

State Street is represented by Ropes & Gray LLP.

The case is In re: State Street Bank and Trust Co. ERISA Litigation, case number 07-cv-08488-RJH-DFE, in the U.S. District Court for the Southern District of New York.