Prudential Retirement Insurance and Annuity is entitled to $28 million under a ruling by a federal court judge who found that State Street Bank and Trust breached its fiduciary duty in managing two fixed-income funds in which Prudential's 401(k) clients had invested.
U.S. District Court Judge Richard J. Holwell in New York, in his written ruling, said State Street had not managed those bond funds prudently and did not diversify them “so as to minimize the risk of large losses.”
However, Mr. Holwell said Prudential failed to prove that State Street had “breached its duty of loyalty to the plans.”
Prudential filed the lawsuit in October 2007 after nearly 200 retirement plan clients with investments in two bond funds managed by State Street Global Advisors — the Government Credit Bond Fund and the Intermediate Bond Fund — suffered losses over July and August 2007 of 23.9% and 16.9%, respectively, even as the funds' benchmark indexes were gaining 2.1% and 2.2%.
Much of the 78-page judgment focused on whether Prudential was justified in believing those funds were “enhanced” bond funds taking incremental risks or fully active funds taking greater risks, with the judge concluding in Prudential's favor.
The judgment noted that State Street employees were aware of the deteriorating situation in the subprime market for asset-backed securities in 2007 but that the company “largely ignored the results of its own investigation,” allowing the bond funds to continue increasing their exposure to that segment of the market.
State Street spokeswoman Arlene Roberts said her company was “disappointed in the court's decision. We intend to pursue an appeal."
Prudential spokeswoman Theresa Miller declined to comment.