SSgA pays out $US6m to one of five litigants

One of the five institutional investors suing State Street Global Advisers (SSgA) over sharp losses from a suite of purportedly low-risk fixed interest funds, which were exposed to subprime-backed securities, has reached a settlement with the manager.

The Alaska Department of Revenue has concluded its lawsuit against SSgA, spurred by losses incurred by the manager’s daily government/corporate bond fund, with a $US6.3 million settlement, pionline.com, the online publication run by US magazine Pensions & Investments, reported last week. It was agreed the December 20 settlement would award the money through a combination of cash and fee rebates, but Brian Andrews, the Alaskan department’s deputy commissioner, would not disclose the split between payment methods. Andrews said the performance of the SSgA fund suffered due to investments tied to the subprime mortgage fallout, and that the manager’s use of leverage “magnified the drop”. “But to their credit, State Street stepped up to the plate and made it right to us,” Andrews said. The losses affected 1,289 members of Alaska’s Supplemental Benefits System, a Social Security replacement plan. From this number, 633 have filed claims against SSgA, amounting to $US3.3 million. SSgA now faces four lawsuits involving a cluster of its actively managed fixed income strategies, which were presented as low-risk investments, that had subprime exposure. The remaining litigants are Nashua Corporation, Unisystems, Inc, Andover Companies and Prudential Retirement Insurance and Annuity Company. The underperformance of the funds, and subsequent client redemptions, has caused asset levels in 12 of SSgA’s fixed income strategies to plummet from $US7.8 billion to $US2.6 billion over the last three months. In addition to the daily government/corporate bond fund, the vehicles involved include the manager’s limited duration bond, intermediate bond and government credit bond funds. In its case against SSgA, Unisystems, a New York-based publisher, alleged that the manager increased its allocation to mortgage-backed securities and other complex instruments from 8 per cent in September 2006 to 25 per cent in March 2007, while the indices those funds were meant to track were comprised 60 per cent of US government bonds, and the remainder consisting largely of corporate bonds, a statement from BLB&G, the law firm representing the company, stated. As a result of their exposure to subprime-backed debt, these SSgA funds lost 40 per cent of their value in August 2007, the statement said. Following on from the steep losses and ensuing lawsuits, William Hunt stood down as SSgA president and chief executive in early January. This coincided with State Street’s announcement that it would record a net charge, after tax, in Q4 2007 of $US279 million, which will help fund a $US618 million pool to deal with the legal costs it now confronts. Some executives running the relevant strategies have now gone, too. Departees include Sean Flannery, SSgA North America chief investment officer; Paul Greff, SSgA director of global fixed income; and Michael O’Hara, SSgA head of active global fixed income. Mark Marinella, previously executive vice president of fixed income trading strategies at State Street Global Markets, State Street’s investment research and trading arm, was appointed to the newly-established position of global chief investment officer of fixed income towards the end of last year. In Australia, representatives of SSgA directed questions regarding the lawsuits to the firm’s head office in Boston.