Prudential Financial, Inc. announced yesterday that one of its subsidiaries has filed a lawsuit against State Street & Trust Corp. and State Street Global Advisors over losses allegedly suffered by Prudential clients in two bond funds managed by State Street.  The suit accuses State Street of “radically” changing its investment strategies for the two funds without disclosing those changes to Prudential or its clients.  Specifically, Prudential claims that State Street went from a conservative investment strategy to one in which it took “undisclosed, highly leveraged positions in mortgage-related financial derivatives.”  This change in strategy allegedly resulted in losses of over $80 million to at least 28,000 participants in retirement plans sponsored by Prudential.

The suit is the first of which we are aware against a high profile investment advisor for losses suffered as a result of July’s mortgage backed debt crisis.  That crisis occurred after the subprime mortgage market collapsed and lenders faced a record number of defaults.  Prudential claims that the crisis resulted in “catastrophic” losses for the two bond funds because, under State Street’s new investment strategy, the funds were heavily concentrated in mortgage related financial derivatives.

According to news reports, State Street has responded to these allegations with an e-mail stating that the recent market conditions were unprecedented and that, in such an environment, some funds would unfortunately suffer losses.  Based on this response, we expect State Street to mount a vigorous defense to this action.

A copy of the Complaint can be found here.  We will continue to monitor this case and report new developments at https://www.insurereinsure.com.