Pension Risk Matters
State Street Sets Aside $618 Million for Pension Lawsuits
New York Times reporter Vikas Bajaj writes that a State Street Corporation 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." (See "State Street Corp. Is Sued Over Pension Fund Losses," January 4, 2007.)
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.
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