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Timothy W. Hill, Et Al. V. State Street Corporation, Et Al. 09-CV-12146

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Timothy W. Hill, Et Al. V. State Street Corporation, Et Al. 09-CV-12146 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 1 of 114 UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS HILL v. STATE STREET CORPORATION : Master Docket No. 09-cv-12146-NG THIS DOCUMENT RELATES TO THE SECURITIES ACTIONS • DOCKET NO. 09-cv-12146-NG • CONSOLIDATED CLASS ACTION COMPLAINT Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 2 of 114 TABLE OF CONTENTS Page I. INTRODUCTION 1 II. THE CLAIMS ASSERTED IN THE COMPLAINT 6 III. JURISDICTION AND VENUE 7 IV. THE EXCHANGE ACT PARTIES 8 A. Lead Plaintiffs 8 B. Additional Named Plaintiffs 9 C. The Exchange Act Defendants 9 1. The Company 9 2. The Officer Defendants 9 V. FACTUAL BACKGROUND AND SUBSTANTIVE ALLEGATIONS 10 A. The Fraudulent Foreign Exchange Trading Scheme 11 1. State Street's Foreign Exchange Operations 11 2. The Importance Of Foreign Exchange Trading Revenue To State Street's Financial Results 13 3. State Street Fraudulently Inflated Its Foreign Exchange Revenue By Hundreds Of Millions Of Dollars Through A Scheme To Overcharge Its Largest Clients 15 a. State Street's Fraudulent Scheme to Overcharge its "Dumb" Clients 16 b. The Foreign Exchange Fraud is Revealed, State Street's CEO Resigns and the United States Attorney and other States Attorneys General Begin Investigating State Street 22 c. The Revelation of the Foreign Exchange Scheme had an Immediate and Profound Negative Impact on State Street's Financial Statements 24 4. State Street Lacked Adequate Risk Controls Which Would Have Prevented Or Detected The Foreign Exchange Trading Fraud 26 B. State Street Misleads Investors About Billions of Dollars In Losses Related to Its Off Balance Sheet Asset-Backed Commercial Paper Conduits And Investment Portfolio 29 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 3 of 114 1. Despite the Devastating Downturn in the Housing Market, Defendants Repeatedly Assure Investors That State Street's Conduit and Investment Portfolio Assets Are of Excellent Quality And Pose No Risk To The Company 32 2. Over the Next Year, As The Housing And Financial Markets Collapse, Defendants Continue To Assure Investors That State Street Is Not Materially Impacted 33 3. Notwithstanding the Unprecedented Collapse of The Financial Markets Defendants Continue To Assure Investors That State Street's Conduit And Investment Assets Are "High Quality" 37 4. Defendants' October 15, 2008 Statements Were Knowingly or Recklessly False 39 VI. DEFENDANTS' GAAP VIOLATIONS 43 A. Defendants' GAAP Violations 43 1. Background And Gaap Standards Applicable To The Conduits 44 2. State Street Failed To Consolidate Its Conduits When Required To Do So By Gaap 45 VII. ADDITIONAL ALLEGATIONS CONFIRMING SCIENTER 50 VIII. ADDITIONAL FALSE AND MISLEADING STATEMENTS 51 A. False and Misleading Statements Relating To 2006 Results 51 1. Statements Regarding Foreign Exchange Operations 51 2. Statements Regarding Internal Controls 54 B. False and Misleading Statements Relating To 2007 Results 56 1. Statements Regarding Foreign Exchange Operations 56 2. Statements Regarding Internal Controls 62 C. False and Misleading Statements Relating To 2008 63 1. Statements Regarding Foreign Exchange Operations 63 2. Statements Involving Conduits and Investment Portfolio 69 3. Statements Regarding Internal Controls 71 D. False and Misleading Statements Relating To 2009 72 1. Statements Regarding Foreign Exchange Operations 72 2. Statements Regarding Internal Controls 74 11 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 4 of 114 IX. LOSS CAUSATION 75 X. PRESUMPTION OF RELIANCE 76 XI. INAPPLICABILITY OF STATUTORY SAFE HARBOR AND BESPEAKS CAUTION DOCTRINE 77 XII. CLASS ACTION ALLEGATIONS 79 XIII CLAIMS FOR RELIEF UNDER THE EXCHANGE ACT 81 XIV. CLAIMS BROUGHT PURSUANT TO THE SECURITIES ACT 87 A. The Securities Act Plaintiffs 87 B. The Securities Act Defendants 88 1. The Company 88 2. The Officer Defendants 88 3. The Director Defendants 89 4. Underwriter Defendants 90 5. Auditor Defendant 91 C. Background Of The Securities Act Claims 92 1. State Street's Foreign Exchange Practices 93 2. State Street's Conduit and Investment Programs 95 3. State Street's Internal Controls 96 D. The Offering Materials Contained Untrue Statements Of Fact And Omitted Material Facts Necessary To Make The Offering Materials Not Misleading 96 1. The Offering Materials Failed To Disclose That State Street Was Overstating Its Foreign Exchange Revenue By Hundreds Of Millions Of Dollars 96 2. The Offering Materials Contained Untrue And Misleading Statements About State Street's Conduit Program And Investment Portfolio 98 3. The Offering Materials Contained Untrue And Misleading Statements About State Street's Internal Controls 99 E. State Street's Financial Statements Failed To Comply With Gaap 100 F. Additional Allegations Relevant To The Securities Act Claims 101 111 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 5 of 114 G. Claims For Relief Under The Securities Act 102 XV. PRAYER FOR RELIEF 106 XVI. JURY DEMAND 107 iv Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 6 of 114 The Public Employees' Retirement System of Mississippi ("MPERS") and Union Asset Management Holding AG ("Union") (collectively, "Lead Plaintiffs") and additional named plaintiffs identified below (together with Lead Plaintiffs, "Plaintiffs") bring this federal securities class action on behalf of themselves and all other persons and entities, other than Defendants and their affiliates as specified below, who purchased or acquired publicly traded shares of State Street Corporation ("State Street" or the "Company") between October 17, 2006 and October 19, 2009 (the "Class Period"), and persons who purchased or otherwise acquired State Street's common stock pursuant and/or traceable to a registered public offering conducted on or about June 3, 2008, and based on the conduct of Defendants asserted herein, were injured thereby. I. INTRODUCTION 1. This case is about a company that violated the federal securities laws by artificially inflating its revenues while intentionally understating its exposure to high risk investments. During the Class Period, State Street and its senior executives told investors that the Company was earning hundreds of millions of dollars in revenue from legitimate "foreign exchange" trading operations, while at the same time avoiding the substantial losses that were plaguing other financial institutions as the global economy deteriorated. 2. In reality, however, State Street's foreign exchange revenues were artificially inflated by what the California Attorney General ("California AG") has termed an "unconscionable fraud." The disclosure of this fraud resulted in the resignation of the Company's CEO, Defendant Ronald E. Logue ("Logue"), and triggered a raft of ongoing investigations by numerous state attorneys general, as well as the Attorney General for the United States of America. When the California AG's action was revealed, State Street's stock declined by more than 12%, wiping out more than $3 billion in market capitalization in one day. 1 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 7 of 114 3. Defendants also concealed that State Street faced billions of dollars in exposure to troubled assets that were in off-balance sheet entities called "Conduits" and State Street's own investment portfolio. As late as October 15, 2008, State Street assured investors that "the asset quality of both our investment portfolio and the conduit program remains high." This statement was false. As defendants knew, State Street held billions of dollars of real-estate mortgage backed securities ("RMBS") and subprime investments that had lost significant value in the face of the declining real estate market. In January 2009, just three months after defendants assured investors that the assets were "high quality," State Street shocked the market by announcing that the losses in these investments had increased from an aggregate $5.4 billion to $9.9 billion, causing State Street's stock to fall 60% in a single trading day. As market observers commented, "State Street's denial of its financial condition is over, and unfortunately for its investors, the news comes a little late "1 4. Before the truth about State Street's conduct was revealed to the public, on June 3, 2008, State Street was able to sell 35.7 million shares of stock at $70 per share (the "June 2008 Offering" or "Offering"), which raised more than $2.8 billion from investors. Forei2n Exchan2e Operations 5. State Street describes itself as "a leading specialist in meeting the needs of institutional investors worldwide." In its Class Period filings with the United States Securities and Exchange Commission ("SEC"), the Company repeatedly stated that its customer relationships were "predicated upon our reputation as a fiduciary and a service provider that adheres to the highest standards of ethics, service quality and regulatory compliance." One of the services that State Street offers its clients is the ability to conduct foreign exchange 1 All emphasis is added unless otherwise noted. 2 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 8 of 114 transactions, which allows clients to purchase and sell foreign securities or engage in currency trades. 6. Foreign exchange trading was an extremely lucrative business for State Street during the Class Period. In just four years, from 2005 to 2008, State Street's revenue from its foreign exchange operations more than doubled, increasing from $468 million in 2005 to $1.08 billion in 2008 (more than 10% of the Company's overall revenue). Defendants provided a break-out of foreign exchange revenue in the Company's SEC filings and regularly touted these substantial revenue increases during the Class Period. Analysts closely followed defendants' statements and highlighted the "growing importance" of foreign exchange revenue to State Street's financial performance. 7. As was ultimately revealed, more than thirty percent State Street's foreign exchange revenue (more than $830 million dollars) and approximately 17 percent of its net income was generated not through legitimate business practices, but through intentional fraud.
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