GLOBAL - State Street has increased the battle fund it set aside in November 2007 to cover potential legal claims regarding its fixed income investment strategies, which were alleged to have exposed institutional investors to sub-prime mortgages.

The global investment group announced in November 2007 it would create a legal expenses reserve worth $618m (€689.7m) “to address legal exposure and other costs associated with the underperformance of certain active fixed income strategies”. Investors at the time complained that the strategies adopted by State Street were not consistent with their own investment intent, in part because it exposed investors to the illiquidity of sub-prime mortgages, and three actions were then launched against the firm. (See earlier IPE story: State Street sued over sub-prime saga)

State Street set up a $618m fighting fund in 2007 but it had just $193m by the end of September 2009 so the firm has added another $250m - a sum which is claimed should be “sufficient” to settle matters.

More specifically, State Street has agreed to settle a class action concerning ERISA participants of fixed income strategies and pay $89.75m, providing the courts agree.

At the same time, the firm said the topped-up legal fund should contain enough to help fight a civil action by the US’ Securities and Exchanges Commission (SEC) and other governmental bodies on matters similar to those raised by investors.

State Street’s chairman Ron Logue said in November 2007 - when the legal actions were initially launched - so the company would continue to “defend ourselves vigorously against inappropriate claims, including those that seek recovery of investment losses arising solely from changes in market conditions”.

The legal claims eventually led to the loss of State Street’s CEO, William Hunt, in January 2008, and the appointment of James Phelan as chief executive. (See earlier IPE story: Legal risk at SSGA sparks CEO departure)

Topics