Missouri Public School Retirement System, Jefferson City, is taking legal action against State Street Bank and Trust Co. in state court after the company demanded that the $27 billion system return $4.2 billion to the bank’s securities lending program.
In October 2008, the system had about $8 billion invested in State Street’s Quality D Short-term Investment Fund, a commingled securities lending fund managed by the bank, according to court documents filed in Missouri Circuit Court in Jefferson City.
Between October 2008 and June 2009, PSRS withdrew a total of $7 billion of securities in more than 35 separate transactions from State Street’s securities lending program, according to court filings. Those securities were moved from the Quality D commingled fund to separate accounts not participating in the lending program.
The system withdrew units of the Quality D fund, valued at $1 per unit, in order to return securities borrowers’ cash collateral deposits. The system has about $1.5 billion remaining in the Quality D fund.
According to the system’s lawsuit, State Street officials in a Sept. 16 phone call to the plan “demanded that PSRS redeposit $4.2 billion in securities back into an account enrolled in State Street’s securities lending program, which would result in $4.2 billion in cash collateral being added to the Quality D Fund. State Street told PSRS that its demand was designed to provide liquidity back to the Quality D Fund that was allegedly inappropriately consumed by PSRS, this harming other investors in the Quality D fund. State Street alleged that the harm was based on PSRS’ transfer of securities from the lending account to a non-lending account.“
State Street told the system that units of the Quality D fund in September were valued at 97 cents, rather than the $1 per unit the system had received for its withdrawals. Because the value of the fund was under the $1 par figure, PSRS officials calculated that the potential loss to the system would be at least $125 million if it met State Street’s demand to move securities back into the Quality D fund.
The system’s lawsuit alleges breach of fiduciary duty and breach of contract by State Street and seeks a temporary restraining order and a preliminary injunction to prevent the bank from taking action against it if PSRS does not return securities to the lending program.
M. Steve Yoakum, the system’s executive director, said the suit is ongoing and that issue is “a valuation question about what’s in the securities lending pooled fund,” and noted that the court filings are “fairly self-explanatory.”
State Street filed an application to the court opposing the temporary restraining order.
State Street spokeswoman Arlene Roberts said: “State Street takes its fiduciary duties very seriously, and our actions are governed by protecting the interests of all of our customers. In our role as trustee, we have taken action to protect interests of the other participants in the fund. This is a matter between us and the state of Missouri; therefore, we have no further comment.”
Both parties were ordered by the court on Oct. 16 to participate in mediation.