State Street, the largest money manager for institutions, may have to pay more than 12 times the $625 million it set aside for damages from lawsuits over losses from subprime-mortgage investments made for pension funds.
Prudential Financial, the second-largest US life insurer, is suing the Boston-based company on behalf of more than 200 retirement plans, alleging that State Street inappropriately invested their money in risky securities. Three other companies filed similar actions.
Neither side has disclosed potential losses, though State Street has reported that the value of assets "adversely affected" by the collapse in subprime mortgages fell 56 per cent to $6.1 billion at the end of 2007 from $13.9 billion on June 30th.
That $7.8 billion decline represents the money manager's maximum legal exposure, according to Marcia Wagner, a partner at Boston-based Wagner Law Group, which specializes in retirement fund and employee-benefit law.
The cumulative loss in value serves as a "ceiling" in these cases, and the $625 million reserve State Street put aside in December is the company's "floor," or minimum liability, Ms Wagner said.
The reserve is a "lowball," Ms Wagner said. "We are talking very large in terms of damages," though they're unlikely to reach as high as the ceiling.
"To the extent plans were misled into purchasing something they were not authorized to purchase, they may have a fiduciary obligation to sue," said Ms Wagner, who isn't representing the investment manager or plaintiffs. "It's sue or be sued."
Three corporate retirement and welfare funds have asked the US District Court in Manhattan to consider granting class-action status, which allows others with similar claims to join a case.
Bloomberg