State Street Sets Aside $618M for Pension Related Lawsuits

New York Times reporter Vikas Bajaj writes that a State Street Corporation (STT) senior executive has been ousted due to sub-prime woes, and that the company has set aside "$618 million to cover legal claims stemming from investments tied to mortgage securities."

Various other news accounts over the last few months name State Street as defendant in five separate pension-related cases. Plaintiffs' attorneys seek redress under the Employee Retirement Security Act ("ERISA"), citing allegations of fiduciary breach. Critics counter that proving bad faith on the part of investment managers (i.e. not acting "exclusively on behalf of plan participants") will be difficult. They further add that "sophisticated" pension funds should know better.

This blog's author predicts that caveat emptor will pop up in many cases to come. A legal outcome in the matter currently before NY jurists, with San Diego's pension plan going after former hedge fund Amaranath Advisors, goes to this very point (among others).

The stakes for defendants and plaintiffs alike are huge. Whatever happens in several of these big cases will open the door to a flood of similar lawsuits. If defendants are found culpable, it will be open season on service providers. Critical questions abound. Are money managers functional fiduciaries even when they disclaim such status? I wrote about this in my article entitled "Can Pension Clients Be Hazardous to Your Financial Healh?" (Mann on the Street, August 2007 and later reprinted in Journal of Pension Benefits, January 2007).

If defendants claim victory, pension investors will be seriously on the hook for ensuring that they fully understand the nature of their investments. Equally grave will be the need to demonstrate that a retirement plan decision-maker has fully vetted external money managers for risk controls, adequate disclosures and suitability in terms of permitted investment strategies.

Watch for more legal news.

Big Questions - Big Money - Big Consequences!

Comments

[opaulo]

Actually, i think you miss the point. These aren't only ERISA issues -- these are broad "Suitability"... issues. Were the funds suitable and/or were the risks disclosed properly. And, in that fight, it's going to be very hard for investors to prove that the funds were unsuitable. As to ERISA, the fiduciary standards are pretty clear -- and so is the need to sue -- if a fiduciary doesn't sue, it might find itself liable. The lawsuit will almost be neccessary simply to clear the fiduciary itself -- that is, if the losses are due to market considerations, then the pension fiduciary also isn't liable to the beneficiaries of the pension.

[SusanMangiero]

Dear Opaulo:

I agree with you that these are not just ERISA issues and are in fact broad "suitability"... issues. What's interesting is that some of the complaints being filed allege securities fraud and disclosure "problems." I am not an attorney and therefore not in a position to offer legal advice or interpretation of legal issues. That said, I don't believe it is complete (correct) to say that a fiduciary gets a pass if a loss is due to market considerations. ERISA mandates a tough standard in the form of prudential process. State pension laws tend to mimic ERISA so the notion of process applies to them as well. Interestingly, and having just spoken at a conference of global pension regulators, the US is in the minority for its emphasis on process versus outcomes. I appreciate reading your thoughtful comments.