State Street Puts $618M Aside for Potential Lawsuits

The State Street Corporation set aside $618 million to cover legal claims related to losses from mortgage security investments after five clients sued it, the New York Times writes.

The clients said they lost tens of millions of dollars in State Street funds that they were told were be invested in low-risk debt like Treasuries and corporate bonds. The lawsuit asserts that State Street changed their strategy and invested the money in subprime mortgages and related derivative contracts, but did not tell investors.

One fund lost 28% of its value during the summer credit crisis, according to the lawsuit.

The number of securities lawsuits increased by 43% in 2007 to a total of 166, according to a study by the Stanford Law School and Cornerstone Research.

“This is the first wave of these securities fraud suits,” said Gregory J. Hindy, a securities lawyer and partner at McCarter & English in Newark . “There could be many, many more.”

Also last week, State Street announced that William H. Hunt had resigned as chief executive of the investment management unit State Street Global Advisors.

State Street, which manages $2 trillion for pension funds and other institutions, saw its shares surge after the announcements, closing at $85.37, a record for the company.

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