Compliance January 29, 2009

Minn. Firm Slaps State Street with Subprime Suit

State Street has been hit with another federal court lawsuit alleging it took positions in risky subprime mortgage-backed securities in its Daily Bond Market fund, without telling anyone it had done so.
Reported by

Apogee Enterprises, a Minneapolis-based glassware manufacturer, charged that the investment decisions State Street made regarding the bond fund represented breaches of State Street’s fiduciary duties under the Employee Retirement Income Security Act (ERISA) that ended up costing its 401(k) plan more than $5 million.

According to the suit, State Street touted the Daily Bond Market Fund as a conservative, stable, risk-controlled, well-diversified option for Apogee’s 401(k) plan, but changed the fund’s strategy during 2006 to take on significantly more risk. Apogee alleged that State Street applied leverage in making the investments in subprime mortgage-backed securities, which had the effect of adding greater risk to the fund.

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State Street misled Apogee about how long it would take for Apogee’s 401(k) to get out of the Daily Bond Market Fund, the company charged. State Street allegedly told Apogee that it would take 60 to 90 days when, in fact, other plan sponsors were able to get out of the fund with 48 hours notice.

The suit said Apogee hired State Street in 1999 as trustee, administrative services provider, and investment manager. Eventually, both State Street and CitiStreet performed services for the Apogee plan.

According to the complaint, 27.29% of the Daily Bond Market Fund’s assets were invested in mortgage-backed securities as of July 31, 2007. From January 1, 2007, to August 24, 2007, the Daily Bond Market Fund lost 20.86% of its value.

Apogee estimates that the fund lost approximately 12.5% of its value between August 9, 2007, when it asked to withdraw from the fund, and August 30, 2007, when it was finally allowed to exit the fund.

The case is Apogee Enterprises Inc. v. State Street Bank and Trust Co., D. Minn., No. 09-cv-00170-DSD-FLN.

A Massachusetts plumbing and air conditioning supply company sued State Street in August over similar allegations (see “State Street Sued over Mortgage-Backed Investments’).

The Markets January 29, 2009

Reader’s Digest ‘Recession Plan’ Includes Match Suspension

The Reader's Digest Association, Inc., has informed employees that it will adopt a global ‘Recession Plan,' including the suspension of company matching contributions to its U.S. 401(k) plan.
Reported by

Other cost-savings measures in the plan include a reduction of approximately 8% of its current global workforce and unpaid time off for employees in both Fiscal 2009 and 2010 where permitted by laws and agreements, according to a news release.

Reader’s Digest cited a drop in consumer spending and magazine advertising in most markets in which it operates as reasons for the move.

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“We have announced a comprehensive ‘Recession Plan,’ which is our internal roadmap for dealing with the extraordinary effects of this recession on consumer spending. We hope and expect that most of these moves will be temporary and that the company will soon resume the progress it made in Fiscal 2008, when we achieved success in our three-part program to launch growth initiatives, reduce costs and transform the company culture,” said Mary Berner, president and CEO, in the release.

Several media companies have also announced benefits cuts to address the hard economic times (see “Newspaper Company Suspends 401(k) Match, Profit-Sharing Contributions’).

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