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Yu v. State Street Corp.

February 25, 2010


The opinion of the court was delivered by: Richard J. Holwell, District Judge


MDL No. 1945

This is a putative securities class action asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The action is part of a web of multi-district litigation over losses at mutual funds managed by State Street Corporation ("State Street") flowing from investments in mortgage-related securities. See In re State Street Bank and Trust Co., 07 Civ. 8488 (RJH), 2009 WL 3458705 (S.D.N.Y. Oct. 28, 2009); In re State Street Bank and Trust Co., 579 F. Supp. 2d 512 (S.D.N.Y. 2008). Plaintiffs in this action allege that defendants misrepresented the nature, extent, and consequences of the investments of one such fund, called the Yield Plus Fund (the "Fund"), in such mortgage-related securities. Those investments eventually crippled the Fund, causing it to wind down in 2008.

Now before the Court are defendants' motions to dismiss the Amended Complaint (the "Complaint") pursuant to Federal Rule of Civil Procedure 12(b)(6). Because the Complaint fails to plead actionable material misrepresentations in the Fund's offering documents, the motions are granted and the Complaint is dismissed in its entirety.



Lead Plaintiff Anatoly Alexander invested in the Fund. He brings this action on behalf of himself and a putative class of all persons and entities who purchased shares in the Fund between July 1, 2005 and June 30, 2008.

The Complaint names two groups of defendants: "State Street Defendants" and "Individual Defendants." The State Street Defendants are State Street and its investment management arm, State Street Global Advisers ("SSgA"), which managed the Fund and offered its shares to the public. (Compl. ¶¶ 6-9.) The Individual Defendants are two executives and eight trustees of SSgA and the Fund. (Id. at ¶¶ 11-20.) Seven of the Individual Defendants call themselves "Independent Trustees," as they claim they were not controlled by State Street or SSgA.

B.The Fund

The Fund was one of a series of more than twenty SSgA mutual funds that defendants offered to the public through a combined registration statement filed annually with the Securities and Exchange Commission ("SEC"). The registration statements included a prospectus that contained a brief description of each fund and a chart of "financial highlights" listing such information as net investment income, operating expenses, and share price. With regard to the Yield Plus Fund specifically, the prospectuses stated that it sought to generate "high current income and liquidity by investing primarily in a diversified portfolio of high-quality debt securities . . . such as mortgage-related securities, corporate notes, variable and floating rate notes and asset-backed securities." (Skinner Decl. Ex. A ("Prospectus") at 4.) The prospectuses also disclosed certain risks of investing in SSgA funds, including the risks posed by asset-backed and mortgage-backed securities.*fn1

Defendants also communicated further information about the Fund to the public through annual reports and Statements of Additional Information, both of which were incorporated into each year's prospectus by reference. (Compl. ¶ 31.) The annual reports contained schedules listing all of the Fund's investments under three major category headings: asset-backed securities, mortgage-backed securities, and international debt. (Id. at ¶ 68, Skinner Decl. Ex. C, Ex. D.) The reports also included a table showing each category as a percentage of the Fund's total assets. In the 2006 annual report, for example, this percentage table disclosed the following figures: asset-backed securities- 68.3%; international debt-21.0%; mortgage-backed securities-11.3%. (Skinner Decl. Ex. C at 12.) The "mortgage-backed securities" category, however, did not capture the full extent of the Fund's investments in mortgage-related securities, because some such securities were listed in the asset-backed category.*fn2 (Id. at 8-9.) The Complaint does not allege what percentage of the Fund's portfolio mortgage-related securities actually represented.

The Fund's share price, called the Net Asset Value ("NAV"), depended on the value of its portfolio. NAV was calculated twice daily according to the following formula: (Assets -- Liabilities)/Number of Shares. (Compl. ¶ 34; Prospectus at 58-59.) The prospectuses disclosed this formula as well as the methods that defendants would use to value each portfolio security. (Prospectus at 59.) Under those methods, securities were to be valued at market price. Where a market price was unavailable or deemed unreliable, the security would be valued in accordance with "Fair Value Procedures," which generally meant "on the basis of the last sale price or, lacking any sales, at the closing bid price . . . ." (Id.)

C.Decline and Liquidation

The Fund's NAV fell 34% during the class period. The NAV had remained stable from July 2005 through July 2007, hovering around $9.96 per share, but it began to drop precipitously in August 2007, falling to $6.60 by May 2008. (Compl. ΒΆ 77.) According to the Complaint, this decline reflected large write-downs to the value of the Fund's mortgage-related ...

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