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SWCBK files ERISA class action against State Street Bank for breach of fiduciary duty for recklessly engaging in securities lending

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On April 7, 2009, Schneider Wallace Cottrell Konecky LLP filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of all 401(k) and pension plans that invested or maintained investments between January 1, 2007 and the present in any collective trusts (the “Collective Trusts”), managed or operated by State Street Corporation, State Street Bank & Trust Co., State Street Bank & Trust Co. of New Hampshire, and State Street Global Advisors (the “State Street Defendants”), that engaged in the practice known as “securities lending.”  The lawsuit is captioned Haygood Phelps Walmsley Willis & Swanson, L.L.P. v. State Street Corporation, et al., Civil Action No. 09-10533 (D. Mass.)

The lawsuit alleges that the State Street Defendants engaged in breaches of fiduciary duties established by the Employee Retirement Income Security Act of 1974 (“ERISA”), as well as other ERISA violations, when they recklessly engaged in “securities lending” for their own benefit and in a manner that involved imprudent and unreasonable risk of loss to the 401(k) and pension plans that invested in the Collective Trusts.  The complaint alleges that the 401(k) and pension plans suffered large financial losses as a result of these securities lending practices.

The practice of securities lending involves the  loan of shares of stock (or other security) by its long-term owner – here, the Collective Trusts – who then secure the loan with collateral.  The collateral is supposed to be invested in safe, short-term, liquid instruments; however, the complaint alleges that the State Street Defendants instead chose investments that were illiquid, highly-leveraged and unduly risky, including mortgage-backed securities and other securitized debt instruments that were inappropriate investments for retirement plans.  The complaint further alleges that the fees and other compensation the State Street Defendants collected in connection with their securities lending activities violated ERISA.

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