Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Nye Lavalle
Prudential Sues State Street Over Losses
Move Shows Risks
Individual Investors
Face in Credit Mess
October 2, 2007; Page C7
A unit of Prudential Financial Inc. sued State Street Corp. subsidiaries over $80 million in losses ascribed to "undisclosed, highly leveraged" investments by State Street that included subprime mortgages.

Prudential said the losses were suffered in accounts held by 28,000 individuals in 165 retirement plans that it markets. These accounts held funds that were managed by State Street, a Boston bank and money manager.

Although Prudential, a big insurer based in Newark, N.J., said it would reimburse its clients for the $80 million they lost, the lawsuit showed that individual investors may be facing some hidden risks from the subprime meltdown in the form of retirement funds that are supposed to be safe, conservative choices.

Prudential said it had placed its clients in two State Street funds -- the Intermediate Bond Fund and the Government Credit Bond Fund -- that the Boston money manager had marketed as investments that would provide "stable, predictable returns" in line with an index of U.S. government and corporate bonds.

Instead, it said State Street changed its investment strategy over the summer without notification and devoted a large portion of the funds' investments into financial instruments that included "asset-based securities that overwhelmingly derived their value" from home-equity loans, mortgage-backed securities swaps, derivatives and other exotic fare. The suit said the bank recently informed Prudential it held a position in "a synthetic index whose returns are linked to 20 subprime U.S. mortgage pools."

Hannah Grove, a State Street spokeswoman, said the company was "extremely disappointed" by Prudential's actions and "we intend to vigorously defend ourselves. The recent market conditions and lack of liquidity were unprecedented," she said. "An unfortunate result of such market events is that some funds lost value."

State Street's shares came under pressure in late August when it disclosed to the Securities and Exchange Commission that it could face liabilities from off-balance-sheet "conduit" entities that it backs. At the time, the bank said the conduits, which also invest in securities backed by assets including mortgages, were sound and having no trouble financing their operations.

At the time, concern was also focused on State Street's management of bond and short-term debt funds that had taken sharp drops in value. One, the Limited Duration Bond Fund, appears to have been included in 401(k) retirement plans offered through State Street's Target Date Funds offerings. The other was the SSgA Yield Plus Fund, which had fallen 7.6% on the three months through the end of August.

Prudential said State Street's management of the funds named in the lawsuit misrepresented their investment strategy and exposed them to undue risk.
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