Prudential sues over fund losses

Prudential Financial Inc., the second-largest U.S. life insurer, sued State Street Corp. on Monday over mortgage-related losses affecting 28,000 retirement plan clients. Reimbursing them would cost Prudential $80 million before taxes.

State Street, the largest U.S. money manager for institutions, changed the investment strategies of two bond funds to make “undisclosed, highly leveraged investments in mortgage-related” assets, the insurer said in a complaint filed in federal court in New York. Some investments were linked to sub-prime home loans, Prudential said.

State Street said it would “vigorously” defend itself.

State Street’s “concentrated” holdings resulted in “catastrophic” results for the funds as investors shunned debt backed by mortgages because of record borrower defaults, Prudential said. Citigroup Inc., the largest U.S. bank, said Monday that third-quarter profit dropped 60% as it lost $1.3 billion on sub-prime assets.

“We believe that what State Street did was wrong and we’re going to go after State Street,” Prudential spokesman Bob DeFillippo said.

Participants suffered losses in the bond funds, which underperformed benchmark indexes by 14% and 28%, said Prudential, which is based in Newark, N.J.

“The funds in which Prudential’s plan clients were invested are actively managed, which entails market risk,” State Street spokeswoman Arlene Roberts said. “The recent market conditions and lack of liquidity were unprecedented. An unfortunate result of such market events is that some funds lost value.”

Prudential said the cost of reimbursing clients would reduce third-quarter earnings, to be released Oct. 31. The insurer reported second-quarter net income of $846 million.

Prudential announced the suit in a regulatory filing after the close of regular trading in U.S. markets.

Prudential shares rose $2.55 to close at $100.13. State Street shares gained $2.34 to $70.50.