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.
On October 20, 2009, the California AG filed a complaint alleging that State Street had
fraudulently overcharged two of California's largest public pension funds by tens of millions of
dollars for foreign exchange trades conducted over a period of at least eight years. The
California AG's action was based on an extensive eighteen-month investigation, which included
interviewing witnesses and reviewing hundreds of thousands of internal State Street documents.
8. According to the California AG, State Street for years had added a secret and
substantial "mark-up" to the exchange rate it used when making foreign exchange trades for its
clients. The scheme was simple State Street had agreements with its large custodial clients that
obligated State Street to charge its clients the same "exchange rate" as the one that State Street
actually used to make foreign exchange requested by the client. Rather than doing so, however,
3 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 9 of 114
State Street perpetrated a scheme where it would execute the trade at one exchange rate without
informing its client, then monitor fluctuations in the rate throughout the day. Then, before the
end of the day, State Street would "cherry-pick" a rate that was more beneficial to State Street,
and tell its clients that the trade had occurred at this other, false, rate State Street's clients had
no way of discovering the fraud because the records they received would show that the trade had
been executed within the range of rates occurring during that day.
9. When the California AG disclosed his lawsuit on October 20, 2009, the price of
State Street's common stocked dropped by more than 12%, on heavy volume, from $52.25 per
share on October 20, 2009 to close at $45.88 per share on October 21, 2009. In news reports
issued during this period, the California AG described State Street's scheme as "the white-collar
kind of rip off that was more subtle than street robbery." The New York Times noted that the
scheme "raises troubling questions about the bank's practices and controls."
10. On October 22, 2009, immediately after these revelations, State Street announced that its CEO, Logue, was "resigning," effective March 1, 2010. Defendant Logue's resignation
came as a complete surprise. An analyst from Janney Capital Markets reported on October 23,
2009, that the CEO's retirement was "unexpected news" and that he believed Logue had been
"pushed out" because he was "ultimately to blame for [State Street's] off-balance sheet
commercial paper conduit saga" (discussed below) and "this week's announcement by the
California attorney general that the State of California is suing the company."
11. Moreover, while the California AG's action related only to allegations of
overcharging California's public pension funds, this practice was widespread and was committed
against the Company's other custodial clients as well. As the California AG stated "California is
not alone . . . there are other state [lawsuits] that you are going to hear about that are presently
4 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 10 of 114
under seal." In its Form 10-K for the year ended 2009, State Street confirmed this fact, stating "a
similar action has been commenced in the District of Columbia. . . and attorneys general from a
number [of] . . . jurisdictions, as well as the U.S. Attorney General's office, have requested
information in connection with inquiries into our foreign exchange pricing."
12. In its Form 10-K for 2009, State Street also admitted that the revelation of its
fraudulent foreign exchange scheme forced it to become more "transparent" in its foreign
exchange practices which, in turn, negatively impacted its revenue. As discussed below, this
fraud inflated State Street's foreign exchange revenue during the Class Period by at least 30%, or
more than $830 million, which represented 11.7% of the Company's Net Income during the
Class Period.
The Conduit And Investment Prom-urns
13. Defendants' false statements were not confined to the Company's foreign
exchange revenues. During the Class Period, State Street and its senior executives also misled the market regarding State Street's exposure to four asset-backed commercial paper "Conduits"
it administere during the Class Period. These Conduits were off-balance sheet entities that raised
money by issuing billions of dollars of short-term commercial paper that State Street marketed
and sold to its institutional clients (the Conduits had more than $23 billion in commercial paper
outstanding during the Class Period). The Conduits used the proceeds from the sale of
commercial paper to purchase large amounts of longer-term assets, including substantial amounts
of real estate mortgage-backed securities ("RMBS"). In addition, State Street held billions of
dollars of investments in its own investment portfolio, which also contained RMBS and
investments in subprime-related companies.
5 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 11 of 114
14. As real estate markets began to collapse in early 2006, a number of commercial
paper programs similar to State Street's were forced into liquidation, and investors became
increasingly concerned that State Street faced similar issues. In response, defendants assured
investors that State Street's Conduits and investments were "higher quality" than those of other
financial institutions, in part because of a "rigorous credit review process" supposedly
implemented by the Company.
15. Defendants continued to reassure investors that the assets in the Company's
Conduits and investment portfolio were performing well and "continued to be strong." As late as
October 15, 2008, with global financial markets in devastation, Defendant Logue stated: "as we
have said in the past, the asset quality of both our investment portfolio and the conduit program
remains high." On a conference call with analysts later in the day, Logue reiterated that the
assets were "of high quality."
16. These statements were revealed to be false just three months later On January
20, 2009, State Street revealed that it had purchased $8.9 billion dollars of the Conduits'
commercial paper during the fourth quarter of 2008 in order to supply the Conduits with liquidity
and that unrealized losses in the Conduits and its investment portfolio totaled nearly $10 billion,
or almost double what Defendant Logue had revealed on October 15, 2008. All three major
rating agencies immediately downgraded the Company, and shares of State Street shed more than half their value, falling from $36.35 to $14.89, a stunning decline of more than 60%.
THE CLAIMS ASSERTED IN THE COMPLAINT
17. Lead Plaintiffs assert two sets of claims on behalf of the Class. The first set of
claims arises from allegations of securities fraud in violation of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") against State Street and certain of its executive
officers. These claims are based on defendants' knowing and/or reckless violation of the
6 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 12 of 114
securities laws during the Class Period. Lead Plaintiffs also asserts control person claims under
Section 20(a) of the Exchange Act.
18. The second set of claims arises under Sections 11, 12(a)(2), and 15 of the
Securities Act of 1933 (the "Securities Act") against those defendants who are statutorily liable for strict liability and/or negligence for materially untrue statements and misleading omissions made in the Registration Statement and Offering Materials (defined in Section XIV, below) filed in connection with the $2.8 billion June 2008 Offering. Lead Plaintiffs also asserts control- person claims under Section 15 of the Securities Act. Lead Plaintiffs expressly disclaim any allegations of fraud in these non-fraud claims.
III. JURISDICTION AND VENUE
19. The claims asserted herein arise under (i) Sections 10(b) and 20(a) of the
Exchange Act (15 U.S.C. §§ 78j(b), 78n(a), and 78t(a)) and the rules and regulations promulgated thereunder, including SEC Rule 10b-5 (17 C.F.R. § 240.10b-5) ("Rule 10b-5"); and
(ii) Sections 11, 12 and 15 of the Securities Act (15 U.S.C. §§ 77k, 771 and 77o).
20. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Exchange Act (15 U.S.C. § 78aa), Section 22 of the Securities Act (15 U.S.C. §
77v), and 28 U.S.C. § 1331, because this is a civil action arising under the laws of the United
States
21. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15
U.S.C. § 78aa), Section 22(a) of the Securities Act (15 U.S.C. § 77v), and 28 U.S.C. § 1391(b),
(c) and (d). Many of the acts and transactions that constitute violations of law complained of herein, including the dissemination to the public of untrue statements of material facts, occurred in this District.
7 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 13 of 114
22. In connection with the acts alleged in this Complaint, defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not
limited to, the United States mails, interstate telephone communications, and the facilities of
national securities exchanges.
THE EXCHANGE ACT CLAIMS
IV. THE EXCHANGE ACT PARTIES
A. Lead Plaintiffs
23. The Public Employees' Retirement System of Mississippi ("MPERS") is the
retirement system for nearly all non-federal public employees in the State of Mississippi and
provides benefits to over 75,000 retirees, and future benefits to more than 250,000 current and
former public employees. MPERS currently manages billions of dollars in assets on behalf of its
members. During the Class Period, MPERS purchased stock in State Street, both throughout the
Class Period and pursuant and/or traceable to the June 2008 Offering, and suffered substantial
damages as a result of the violations of the securities laws alleged herein. On May 24, 2010, the
Court appointed MPERS to serve as Co-Lead Plaintiffs in this consolidated securities class
action.
24. Union Asset Management Holding AG ("Union") is the holding organization of the Union Investment Group and has offices in Germany, Luxembourg, Poland and Italy. Union,
which as more than 2,500 employees and more than 50 years of investment experience, manages
more than $225 billion in assets and ranks among the three leading German fund managers by
market share. During the Class Period, Union purchased State Street stock and suffered
substantial damages as a result of the violations of the securities laws alleged herein. On May
24, 2010, the Court appointed Union to serve as Co-Lead Plaintiffs in this consolidated securities
class action.
8 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 14 of 114
B. Additional Named Plaintiffs
25. The Miami Beach Employees Retirement Plan ("Miami Beach") is a public
pension fund that provides retirement and other benefits to employees of Miami Beach, Florida.
Miami Beach has approximately 1,000 retirees and approximately 1,200 active members and
manages approximately $400 million in assets. During the Class Period, Miami Beach
purchased stock in State Street and suffered substantial damages as a result of the violations of the securities laws alleged herein.
26. Marilyn Demory purchased or otherwise acquired State Street common stock
during the Class Period and suffered substantial damages as a result of the violations of the
securities laws, as alleged herein.
C. The Exchan2e Act Defendants
1. The Company
27. Defendant State Street is a Massachusetts corporation with its principal executive
offices located at One Lincoln Street, Boston, Massachusetts, 02111 State Street is a financial
holding company that, through its subsidiaries, provides a full range of products and services for
institutional investors — principally, custodial services, investment servicing and investment
management. As of December 31, 2008, State Street had $12.04 trillion of assets under custody
and $1.44 trillion of assets under management.
2. The Officer Defendants
28. Defendant Ronald E. Logue ("Logue") was the Chairman of the Board of Directors
and Chief Executive Officer ("CEO") of State Street from June 2004 through March 1, 2010, and
sewed as President and Chief Operating Officer ("COO") of State Street from 2000 until June 2004.
In his role as COO, Logue was responsible for overseeing, among other things, State Street's trading
practices, including the Company's foreign exchange trading practice. He is currently a non-
9 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 15 of 114
executive Chairman of the Board of State Street. Defendant Logue signed each of State Street's
Form 10-Ks and the Sarbanes-Oxley certifications contained within each of State Street's Form 10-
Ks and 10-Qs, throughout the Class Period.
29. Defendant Edward J. Resch ("Resch") has been the Executive Vice President and
Chief Financial Officer ("CFO") of State Street from 2002 to the present. Defendant Resch signed
each of State Street's Form 10-Ks and 10-Qs, and the Sarbanes-Oxley certifications contained within
each of State Street's Form 10-Ks and 10-Qs, throughout the Class Period.
30. Defendants Logue and Resch are collectively referred to herein as the "Officer
Defendants." Collectively, State Street and the Officer Defendants are referred to as the
"Exchange Act Defendants."
V. FACTUAL BACKGROUND AND SUBSTANTIVE ALLEGATIONS
31. During the Class Period, State Street presented a picture of a conservative
company that was increasing its revenues and performing extremely well, even as other large
financial institutions struggled in the face of a global recession. For instance, at the start of the
Class Period, on October 17, 2006, Defendant Logue stated the Company's goal was to achieve
"consistent quarterly earnings streams higher in favorable times, yet predictable in more
challenging times."
32. The Company's strategy seemed to be paying off for much of the Class Period.
Between 2006 and 2009, State Street enjoyed strong and consistent revenue during the worst of the global financial crisis, at a time when some of the most renowned and venerable international
financial institutions were struggling. For instance, by mid-September 2008, Bear Stearns &
Co., Inc. had collapsed and became a wholly-owned subsidiary of JPMorgan Chase, Lehman
Brothers filed for bankruptcy protection, and there was doubt as to whether Citibank would
10 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 16 of 114
survive the crisis. By contrast, State Street's total revenue increased from $6.31 billion at year- end 2006, to $8.34 billion at year-end 2007, and peaked at $10.7 billion at year-end 2008.
33. By giving the appearance of a safe, conservative Company achieving consistent performance even in challenging times, State Street was able to conduct a massive secondary offering of common stock. On or about June 3, 2008, the Company completed a $2.8 billion registered public offering of 14 million shares of State Street common stock at a price of $70 per share. This enormous influx of capital helped State Street continue to portray itself as successful despite declining market conditions. For instance, on July 15, 2008, Defendant Logue noted
"We are pleased to achieve positive operating leverage on both a quarter-to-quarter and on a year-over-year basis, the fifteenth consecutive quarter as measured on a year-over-year basis."
34. As discussed below, State Street's purportedly strong financial performance during this time was in large part an illusion. State Street was artificially inflating its revenues by hundreds of millions of dollars by defrauding its foreign exchange clients, while understating its exposure to, and losses from, its Conduit program and investment portfolio.
A. The Fraudulent Foreign Exchange Trading Scheme
1. State Street's Foreign Exchange Operations
35. State Street describes itself as "a leading specialist in meeting the needs of institutional investors worldwide." One of the financial services that State Street offers its clients is foreign exchange services, which enable clients to exchange U.S. Dollars into foreign currency and vice-versa. State Street's clients typically use these services to trade foreign securities or to convert foreign currency held in their custodial accounts into U.S. Dollars.
36. All foreign exchange transactions are executed at a prevailing exchange rate, which determines how much one currency is worth in terms of another. The most commonly- used exchange rate is the Interbank rate, which fluctuates throughout each day and is tracked and
11 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 17 of 114
published by various industry sources. Throughout the Class Period, State Street executed two types of foreign exchange transactions for its clients. First, some of State Street's clients would
conduct "direct" foreign exchange trades In a direct trade, an institution would contact a State
Street representative who would quote an exchange rate that the institution could accept or reject.
If State Street's rate was sufficiently competitive, the client would accept and the trade would be
executed at the agreed upon exchange rate State Street would collect a fee for processing the trade and pass along the cost of the exchange rate to its client.
37. Second, for more than 75% of its large custodial clients, State Street would
conduct "indirect" foreign exchange trades In an indirect trade, neither the institution nor its
outside investment manager would be quoted an exchange rate. Instead, the client would request
a transaction involving a foreign exchange (such as a purchase of foreign securities), and State
Street would execute the transaction pursuant to its contract with its client. Under the terms of
State Street's custodial arrangements, State Street was obligated to provide its clients the same
exchange rate that State Street actually used to make the trade. This arrangement was supposed to be beneficial to State Street's clients because, among other things, they would not have to
incur the expense and time of identifying and choosing the most competitive exchange rate.
38. The terms of a typical contract between State Street and its custodial clients are
illustrated by the contract between State Street and the State of California's largest public
pension funds, the California Public Employees' Retirement System ("CalPERS") and the
California State Teachers' Retirement System ("CalSTRS"). As was revealed in the California
AG's Action (discussed in more detail below), State Street's contract included a section titled
"Competitiveness of Your Rates," in which State Street described how it provided the best
12 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 18 of 114
All trades are priced based on the interbank rate at the time the trade is executed. As all trades are priced based on the prevailing interbank rate at the time of the trade, we guarantee that we provide competitive pricing for all foreign exchange transactions, regardless of size, currency or contract type . . .
Clients executing foreign exchange transactions with State Street . . . are guaranteed to receive the most competitive rates available for all FX transactions, regardless of size, currency or contract type, because all trades are priced based on the interbank rates at the time the trade is executed.
39. These terms memorialized State Street's guarantee to provide competitive exchange rates for all foreign exchange transactions, regardless of size, currency or contact type.
State Street itself has confirmed in its Form 10-K for the year ended 2009 that the same foreign exchange trading services it offers to CalPERS and CalSTRS are also offered "to a broad range of custody clients in the U.S. and internationally."
2. The Importance Of Forei2n Exchan2e Tradin2 Revenue To State Street's Financial Results
40. During the Class Period, foreign exchange trading was an extremely lucrative business for State Street State Street leveraged its position as custodian of trillions of dollars in assets to make billions of dollars from foreign exchange trading State Street's revenue from foreign exchange trading services grew precipitously during this time, and comprised a significant percentage of the Company's overall revenue:
13 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 19 of 114
Year-End Foreign Exchange Percent Increase Percent of Total Revenue from Prior Year Revenue
2005 $468 million 10% 8.5°A
2006 $611 million 31% 9.7%
2007 $802 million 31% 9.7%
2008 $1.08 billion 25% 10.1%
41. State Street was aware that investors and analysts focused on the Company's
foreign exchange revenue during the Class Period. Indeed, State Street provided a break-out of
its foreign exchange revenue in its SEC filings and press releases and regularly touted revenue
increases during the Class Period. For instance, in the Company's Form 10-K for the year ended
2006, State Street told investors "foreign exchange trading revenue increased 31%, to $611
million from $468 million in 2005, and benefited from a strong first half of the year." Similarly,
on a conference call held on October 16, 2007, Defendant Logue stated.
[W]hile market conditions in the third quarter presented challenges . . . it also created more opportunities in foreign exchange and in securities finance than we usually expect in the third quarter. . . . Revenue from foreign exchange increased 98% from the year ago quarter, and 29% from the second quarter.
42. On a January 15, 2008 conference call, Defendant Logue stated, "Foreign
exchange revenue in 2007 was up 31%." Defendant Resch stated, "higher volumes and stronger
volatility in our foreign exchange business drove a 79% increase in foreign exchange trading
revenue[1" In a press release issued on April 15, 2008, Defendant Logue stated, "the 74%
increase in foreign exchange revenue is due to higher volatility and increased volume."
43. Analysts also focused on the increasing revenue that State Street was earning through its foreign exchange trading operations. On October 16, 2007, RBC Capital Markets
issued an analyst report noting that State Street's earnings-per-share ("EPS") was $0.24 per share
14 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 20 of 114
above RBC's estimate and $0.21 per share better than the consensus estimate. RBS attributed
most of the Company's success to its foreign exchange revenue: "Approximately $0.17 of the
increase was due to much better than expected gains in foreign exchange trading income due to
volatility in the markets." Following the release of State Street's fourth quarter 2007 results,
RBC issued another report on January 16, 2008 stating that, "Nelative to our model, the
company reported much better than expected gains in foreign exchange trading income."
3. State Street Fraudulently Inflated Its Foreign Exchange Revenue By Hundreds Of Millions Of Dollars Through A Scheme To Overcharge Its Largest Clients
44. In its annual and quarterly filings, the Company consistently attributed its
enormous growth in foreign exchange revenues to one of three factors: (1) "the volume and type
of customer foreign exchange transactions;" (2) "currency volatility and trends;" and (3) "the
management of currency market risks." When there were declines in State Street's foreign
exchange revenue, the Company and the Officer Defendants attributed them to lower volumes
and weaker volatilities. When there were increases — which there consistently were during most
of the Class Period — the Company and the Officer Defendants attributed them to high customer
volumes and high volatility in the markets. For example, on a conference call held on January
17, 2007, Defendant Resch stated . "Increased volumes and improved customer mix partially
offset by weaker volatility drove an 18% increase in foreign exchange. Foreign exchange trading revenue was up $21 million to $141 million." Similarly, on a conference call held on
October 16, 2007, Defendant Resch stated that, "[unusually strong volatility in our foreign
exchange business drove a 98% increase in foreign exchange trading revenue compared with the third quarter of last year, and up 29% from the second quarter."
45. In reality, however, State Street did not double its foreign exchange revenue
between 2005 and 2008 merely as a result of increased customer volumes, general market
15 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 21 of 114
volatility or "the management of currency market risks." Rather, as was first revealed on
October 20, 2009, these increases were in large part due to a long-running fraudulent scheme to
overcharge State Street's largest institutional customers for foreign exchange trades.
a. State Street's Fraudulent Scheme to Overcharge its "Dumb" Clients
46. The fraudulent scheme first revealed by the California AG began no later than
2001, and ended only upon disclosure of the California AG's lawsuit.2
47. The scheme itself was relatively straightforward. Upon receiving an "indirect"
foreign exchange order from one of its custodial clients, State Street would execute the trade
early in the day at the foreign exchange rate available at that time. As discussed above, pursuant to contracts with its clients, State Street was obligated to charge the same exchange rate — usually the Interbank rate — as the one it actually used to execute the transaction with the client. Instead
of doing so, the Company would monitor market fluctuations in the exchange rate over the
course of the day and pick a rate to charge its custody clients that was more beneficial to State
Street.
48. For instance, if the transaction was a purchase of a foreign security, State Street
would charge the client a higher foreign exchange rate that occurred later in the day, thus causing the client to pay more than what State Street had already paid. If the transaction was a sale of a
2 The California AG's complaint was related to a previously sealed gut tam whistleblower lawsuit originally filed on April 14, 2008 in the Superior Court of California. The quz tam suit alleged that since at least 2001, State Street had violated the California False Claims Act by charging false or inflated foreign exchange rates since at least 2001 to CalPERS and CalSTRS. According to the California AG, the whistleblowers who filed the original lawsuit were "industry insiders" with detailed knowledge of the illegal practices at State Street. A confidential source who was directly involved of the investigation conducted by the California AG (the "AG source") confirmed that the allegations in the AG complaint were based on internal State Street documents the AG source's office reviewed and witnesses the office interviewed during the course of that investigation.
16 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 22 of 114
foreign security, State Street would charge the client a lower foreign exchange, thus paying the
client less than what State Street actually received. In either event, State Street would take for
itself the difference between the amount for which the trade was actually executed and the
amount that State Street charged its clients.
49. State Street was only able to perpetrate this scheme against its custody clients
who had handed their foreign trading operations over to the Company. According to the gut tam
complaint and confirmed by Lead Plaintiffs' investigation, State Street referred to these clients —
usually public pension funds — as "dumb" clients or "dumb money" because they had no way of
double-checking the exchange rate State Street had actually used to execute their trade By
contrast, clients who conducted direct trades would be quoted an exchange rate by State Street
before executing the transaction. These clients — often large hedge funds — typically had easy
access to an alternate price source, such as Bloomberg or Reuters, to double-check the truthfulness of State Street's rate quotes. Accordingly, State Street could not overcharge these
clients, and thus referred to them internally as "smart" clients or "smart money."
50. State Street deliberately designed its systems to further the scheme to defraud its
"dumb" clients. As detailed in the California quz tam action, these clients or their investment
managers would initiate a foreign exchange transaction by sending a request, often
electronically, to the Securities Processing Unit of State Street, which was located on the
"custody side" of the Company. This request was then sent electronically to the State Street
foreign exchange trading desk in State Street's Global Markets division, where it would appear
on the Market Order Management System ("MOMS") software used by State Street's traders.
51. Upon receipt of the request, State Street's foreign exchange traders would check the exchange rate, set a price, and execute the transaction, which typically occurred early in the
17 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 23 of 114
day since State Street traders are at their desks by 7 a.m. Eastern Standard Time. All of those transactions were then entered by the trader into a separate software system called Wall Street
Systems ("WSS"), which memorializes the transaction and charges the cost (for purchases) or
remits the payment (for sales) directly to State Street. The WSS would record time stamps for the actual "real time" transaction.
52. Although the transaction was now completed and the price locked in, State Street
did not inform the client. Instead, as confirmed to Lead Plaintiffs by the AG source, State Street
would observe market fluctuations until sometime around 3 p.m. in the afternoon and then assign
either a higher exchange rate (for purchases) or a lower exchange rate (for sales) to the foreign
exchange transactions occurring during the day State Street would then fraudulently apply that
rate to all of the "indirect" foreign exchange transactions it had conducted that day.
53. As detailed in the California AG's Complaint, State Street would enter the "false"
exchange rate into its MOMS system, and the manipulated transaction details would be sent back to the custody group to be cleared with the client. The client would not receive any record of the time or rate of the earlier transaction or the time when the false exchange rate occurred. Once
complete, State Street would automatically debit or credit its clients' custodial accounts utilizing the false exchange rates entered into the MOMS system by State Street's employees.
54. State Street deliberately falsified its internal and external reports to conceal the
fraud. The Company provided its clients with monthly "FX Spot Purchase/Sale Activity
Reports," detailing all foreign exchange transactions performed for the client in that period. It
would also download the foreign exchange trading into its on-line client reporting database,
MyStateStreet.com. These reports and databases would not reflect the true exchange rate at
which State Street had executed the transaction earlier in the day. Instead, they would show the
18 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 24 of 114
false exchange rate that was fraudulently selected by State Street and manually entered into State
Street's systems. According to the allegations in the qm tam complaint, a comparison of the
rates and times recorded on the WSS system, on the one hand, and on the MOMS system, on the
other hand, will show that in the vast majority of cases, a corresponding trade was made earlier
in the day at a different rate more favorable to State Street.
55. A fraud of this length and magnitude, and perpetrated against State Street's
largest custody clients, was not a plan devised and kept hidden by low-level employees.
According to the AG source, while State Street went to great lengths to avoid documenting its
custody foreign exchange trading practice in writing, the practice was well known within the
Company.
56. In fact, internal documents produced to the AG from State Street's own files and
quoted in the California AG's complaint confirm that State Street executives knew that the
Company's custody foreign exchange trading practices violated the agreements it had with its
clients, and knew that they needed to conceal these practices from clients. For example, one
State Street senior vice president said in an email to another State Street executive that, "[If
providing execution costs will give [CalPERS] any insight into how much we make off of FX transactions, I will be shocked if [a State Street V.P.] or anyone would agree to reveal the
information." Another State Street executive sought help in formulating a strategy to respond to
a request from the California funds for more "transparency" into the Company's foreign
exchange practices, writing in an email obtained by the California AG, "[any help you can offer
would be appreciated The FX question is touchy and if we can't provide any further
information, we have to somehow get [CalPERS] comfortable with that . . . ." These and other
documents have not yet been publicly released, but are in the possession of the California AG.
19 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 25 of 114
57. Moreover, according to allegations in the California gut tam complaint, State
Street's senior management were "aware of and actively promote [d] the fraudulent FIX scheme,"
issuing "verbal instructions to FIX traders to utilize market volatility to manipulate the rate
charged as much as possible without causing the client to notice." Senior management also
"issued a written document setting forth the amount by which the rate charged to each indirect trading client may be manipulated." This document, like others available to the California AG,
is not yet publicly available.
58. The quz tam plaintiffs allege that the fraudulent foreign exchange trading practices
were "promoted and institutionalized at annual off-site conferences for high-ranking executives."
This fact was corroborated by a confidential witness contacted during Lead Plaintiffs'
investigation. Confidential Witness ("CW") 1 worked at State Street from June 1991 until
December 2008, and held the positions of Managing Director of Global Markets from 2004 through 2006, and Senior Managing Director and Head of Global Business Integration from
January 2007 through December 2008. This witness confirmed that State Street held offsite
executive-level conferences attended by the heads of the Company, including the Officer
Defendants Logue and Resch, three times a year, and that these conference would include a
discussion of foreign exchange strategy.
59. CW 2, an employee at State Street from 1998 through 2003 and former Trade
Helpdesk Specialist at State Street's Quincy, Massachusetts office, worked directly with
CalPERS and CalSTRS in assisting with their trades and securities lending from 2001 on. CW 2
had knowledge of the foreign exchange fraud and confirmed that these practices commenced as
early as 2000 and that State Street was "absolutely" overcharging clients for foreign exchange transactions because the overpricing of foreign exchange trades was "what they were doing to
20 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 26 of 114
make money." CW 2 further explained that managers instructed CW 2 to mark up or mark down
manually foreign exchange trade rates on the system with a new rate so that it would financially
benefit State Street. CW 2 stated that State Street handled all of its clients in this manner and that "everyone" at State Street knew of this practice. CW 2 questioned these rate changes (which
always benefited State Street), and the practice of rebooking foreign exchange trades at different
rates, at weekly meetings with superiors present, but was ignored when raising these concerns.
60. Indeed, these employees confirmed that the improper foreign exchange trading
practices were widely known inside the Company. CW 2 stated that the executives of the
Company "have to have been aware of what was going on. How could they not? Everybody
knew." By early 2005, within one year of being promoted to Managing Director of Global
Markets, CW 1 observed colleagues speaking openly about how it was easy to profit from those transactions because the custody clients did not need to approve the exchange rates and thus, the
rates applied to their exchanges were less transparent. Another former State Street employee
contacted in the course of Lead Plaintiffs' investigation, CW 3, worked in Boston from 2006 to
2008 in the Foreign Exchange Sales and Trading Division, and first heard talk of shady practices
in State Street's foreign exchange trading for CalPERS and CalSTRS in late 2006. According to
CW 3, CW 3's managers tried to keep very "hushed" about the nature of the controversy to
lower-level employees, but this could not stop the widespread practice from being fairly well-
known inside the Company.
61. Another former State Street employee noticed serious discrepancies between the
actual foreign exchange trade rate and the rate recorded for clients, but was waived off by the
former employee's managers. CW 4, employed by State Street between July 2007 and May
2010 as a Global Trade Settlements associate, worked with mutual funds and pension funds,
21 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 27 of 114
62. Not only did State Street manipulate the foreign exchange rates charged to its
custody clients, but Lead Plaintiffs have discovered through their investigation that the Company
also overcharged clients by "rounding up" foreign currency rates, even if the decimal was less than 0.5. According to CW 5, a manager in State Street's money markets division dealing with
international transfers from 1999 through 2003, stated that employees were instructed by senior
management to always round up foreign currency and other rates. For instance, if a number was
7.22, employees were instructed to round up to 8 when calculating rates and fees. CW 5 opined that State Street "was committing fraud" with this practice. Because State Street dealt with large
volumes of trades at high dollar amounts, this practice resulted in enormous excess profits for the
Company.
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
63. On October 20, 2009, State Street's manipulation of foreign exchange rates was
revealed publicly for the first time. In a press release issued that day, the California AG
22 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 28 of 114
announced that the State of California had filed a false claims act complaint against State Street
based on an "unconscionable fraud" directed at the California pension funds, stating, "[T]his is just the latest example of how clever financial traders violate laws and rip off the public trust."
64. On this news, the price of State Street's common stocked dropped by more than
12%, on heavy volume, from $52.25 per share on October 20, 2009, to close at $45.88 per share
on October 21, 2009.
65. On October 22, 2009, immediately after these revelations, State Street announced the retirement of its CEO, Defendant Logue, effective March 1, 2010. This "retirement" was
unexpected. Indeed, on the morning of October 20, 2009 — before the California Attorney
General announced his lawsuit — State Street had held an earnings conference call that was
chaired by Defendant Logue during which there was no mention of an impending or possible
retirement. An analyst from Janney Capital Markets reported on October 23, 2009 that Logue's
retirement was "unexpected news" and "there was no indication [that] the CEO was planning to
retire." The analyst believed that Logue had been "pushed out":
Mr. Logue was ultimately to blame for STT's off-balance sheet commercial paper conduit saga, outstanding client lawsuits, the recent Wells notice, and this week's announcement by the California attorney general that the State of California is suing the company. Although the CEO change is being positioned as Mr. Logue's "leadership succession plan announcement", we believe he will be viewed by investors as being pushed out.
66. As has since been revealed, State Street's practices of overcharging its clients was
not confined to California funds. Other states attorneys general and the United States Attorney
General are currently investigating State Street for perpetrating this scheme against other clients
nationwide. As the California AG stated in October 2009: "The state of California is not alone
... there are other state [lawsuits] that you are going to hear about that are presently under seal."
23 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 29 of 114
This fact was confirmed by State Street itself In the Company's Form 10-K for the year ended
2009, filed on February 22, 2010, State Street stated.
A similar action [to the California AG action] has been commenced in the District of Columbia by an anonymous whistleblower who purports to sue on behalf of DC public pension funds. We provide custody and foreign exchange services to government pension plans in other jurisdictions, and attorneys general from a number of these other jurisdictions, as well as the U.S. Attorney General's office, have requested information in connection with inquiries into our foreign exchange pricing.
c. The Revelation of the Foreign Exchange Scheme had an Immediate and Profound Negative Impact on State Street's Financial Statements
67. The disclosure of the California AG's Action and State Street's fraudulent foreign exchange trading practices ended the Company's manipulation of exchange rates and had a materially negative impact on the Company's foreign exchange revenues.
68. Immediately following this disclosure, State Street saw a steep decline in its foreign exchange trading revenue, which suffered a 56% decline from the fourth quarter of 2009
($144 million) compared to the fourth quarter of 2008 ($330 million). While State Street attributed the fourth quarter 2009 decline to lower "customer volumes" and a decrease in
"currency volatility," as State Street itself admitted in its Form 10-K for 2009, customer volumes declined by only 16% from 2008 to 2009, and currency volatility decreased by only 4%. In reality, a substantial portion of the 56% decline was the direct result of the disclosure of the
California AG's action, which forced State Street to stop fraudulently overcharging its clients.
69. Indeed, in its 2009 Form 10-K, which addressed the California AG action and other investigations by various state attorneys general and the U.S. Attorney General, State Street explicitly admitted that the Company had changed its foreign exchange trading practices to add
"transparency," and that this change would lead to a decline in foreign exchange revenues:
24 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 30 of 114
In light of the action commenced by the California Attorney General, we are providing customers with greater transparency into the pricing of this product and other alternatives offered by us for addressing their foreign exchange requirements. Although we believe such disclosures will address customer interests for increased transparency over time such action may result in pressure on our pricing of this product or result in clients electing other foreign exchange execution options which would have an adverse impact on the revenue from and profitability of, this product for us.
70. The gut tam plaintiffs (who the California AG referred to as "industry insiders"
with detailed knowledge of the illegal practices at State Street) alleged that State Street generated
$400 million in fraudulently-obtained trading revenue annually, constituting one-third of
Defendants' trading revenue. Without access to State Street's internal documents, it is not
possible to determine the precise amount that State Street was inflating its foreign exchange
revenue through the scheme described herein. However, the 56 percent decline in revenues for the quarter immediately following disclosure of the fraud provides a verifiable basis for
estimating the impact of the fraud, and coupled with the determination by the quz tam plaintiffs that the foreign exchange fraud artificially inflated State Street's total trading revenues by at least
one-third, a conservative estimate is that the Company's foreign exchange revenue was
artificially inflated by at least 30% during the Class Period, which would result in a Class Period
overstatement of at least $832 million, and an overstatement of net income by 11.7 percent.
71. The estimated impact of this fraud on State Street's foreign exchange revenue and
net income for each financial period in the Class Period is set forth in the charts below:
Impact on FX Trading Revenues
Inflated Period Reported FX Actual FX Revenue Amount FX Revenue Without Fraud Revenue Overstated 2006 (4Q) $141,000,000 $99,000,000 $42,000,000
2007 $802,000,000 $561,000,000 $241,000,000
25
Case 1:09-cv-1 21 46-NG Document 45 Filed 06/25/10 Page 31 of 114
2008 $1,080,000,000 $756,000,000 $324,000,000
2009 (1Q-3Q) $750,000,000 $525,000,000 $225,000,000
Total $2,773,000,000 $1,941,000,000 $832,000,000
Impact on Net Income
Inflated Period Reported Net Actual Net Income Percentage of Income Without Fraud Overstatement 2006 (4Q) $309,000,000 $283,000,000 8.4%
2007 $1,261,000,000 $1,100,000,000 12.7%
2008 $1,811,000,000 $1,600,000,000 11.4%
2009 (1Q-3Q) $1,305,000,000 $1,145,000,000 12.2%
Total $4,686,000,000 $4,130,000,000 11.7%
4. State Street Lacked Adequate Risk Controls Which Would Have Prevented Or Detected The Forei2n Exchan2e Trading Fraud
72. State Street's foreign exchange scheme thrived in large part because the Company
lacked adequate risk management policies or internal controls designed to prevent or uncover
fraud. Lead Plaintiffs' investigation has unearthed evidence that State Street's foreign exchange
trading practices not only violated the express terms of custodial service agreements, as
discussed above, but were also in violation of widely accepted foreign exchange trade practices.
73. Lead Plaintiffs' investigation has revealed that, rather than adopt industry-
accepted practices, State Street deliberately designed its system to foster fraudulent practices.
Specifically, lax internal controls and nonexistent risk management practices created the
environment that permitted this fraud to continue unabated for nearly eight years. CW 6 joined
26 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 32 of 114
State Street in March 2008 as a Senior Vice President focused on improving State Street's risk
management practices. When he began working at State Street, he was surprised to learn that
before 2006, State Street had no Risk Management department. Even after Risk Management
was created, it was completely ineffective. CW 6 stated that "Risk Management was a joke,"
and that most people in that department, including its two heads, were not qualified to do their jobs and had no knowledge of risk management. CW 6 also noted that when he arrived at the
Company, State Street input foreign exchange transactions and trade prices manually, providing the Company with the opportunity to do things that should not have been done.
74. Not only did State Street lack basic internal risk controls to prevent the fraudulent
foreign exchange practices, but Lead Plaintiffs' investigation has revealed that State Street did
not apply even the minimal internal risk controls it did have to transactions for certain larger
institutional clients, including CalPERS and CalSTRS. According to CW 3, who worked for
State Street Global Markets in Boston from 2006 to 2008 as a senior administrative associate in the Foreign Exchange Sales and Trading Division, certain clients' paperwork bypassed the
Company's normal internal control processes and were "pushed through" the system. As CW 3
observed, this overriding of internal control procedures allowed State Street to manipulate the
actual prices of the exchanges paid on behalf of those clients. Part of CW 3's responsibilities
was to archive the audit sheets that reconciled the trades on the foreign exchange trading desk at the end of the day. From that experience, CW 3 stated that, "I know for a fact that there was no
fair record keeping. If you audited [State Street's] records, you would have very little trouble
showing that they had a failure in their recording systems." CW 3 also confirmed that State
Street's records and databases were outdated.
27 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 33 of 114
75. Lead Plaintiffs' counsel have consulted with Professor Heinz Riehl, a professor of
Finance and International Business at the Stern School of Business at New York University.
Professor Riehl is a highly regarded expert in the area of foreign exchange trading and
controlling risks associated with financial trading. Professor Riehl had a thirty-six year career at
Citibank in New York, where he was involved with all aspects of foreign exchange trading. At
Citibank, he co-developed the bank's Market Risk Policy and was a member of Citibank's Credit
Policy Committee. He served several terms as the Chairman of the New York Federal Reserve
Bank's Foreign Exchange Committee, and was a full member of that Committee for fifteen
years.
76. Professor Riehl has written two books on foreign exchange trading. In his book titled, Managing Risk in the Foreign Exchange, Money & Derivative Market (1998), Professor
Riehl described the basic guidelines that foreign exchange dealers should implement in order to
maintain sufficient internal controls to prevent errors and fraud. Professor Riehl recommended that all banks implement a "rate reasonability process" at the inception of trades "to ensure that
all trading room transactions are executed . . . at the prevailing market rates." By requiring "an
independent verification of the prices at which transactions are executed and booked,"
companies can prevent fraud stemming from either a lack of control at the moment the transactions are executed or a lack of control at the moment a rate is assigned to a client.
77. Professor Riehl's book explained that the type of rate manipulation that occurred
at State Street during the Class Period is an obvious and well-known risk that proper internal
controls should account for and prevent:
Let us discuss a process that sometimes is viewed as a rate reasonability test but is definitely not acceptable. In this case the risk manager waits until the end of the day, when the range of market prices that have prevailed during the day is known. For example, the low may have been 20 while the high was 80. The risk manager
28 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 34 of 114
then checks all the tickets to verify that contract rates are not lower than 20 or higher than 80. This does not constitute satisfactory control. The trader may have transacted at 30 while the market was 70, and therefore, management should not rely on this type of system.
78. At Lead Plaintiffs' request, Professor Riehl has reviewed the California AG's
complaint, along with the qm tam complaints, and certain other pleadings and filings in the
California AG's action. Based on his review of this material, as well as his substantial practical
and academic experience in the fields of foreign exchange trading, Professor Riehl concluded that State Street's practices, as alleged, were unlawful and did not conform to minimal
acceptable standards for custody foreign exchange trades In Professor Riehl's view, consistent
application of basic control mechanisms would have revealed the intended and systematic
overcharging of clients by the Company. Professor Riehl opined that those at the head of the
Company ignored fundamental internal control policies and practices over the course of many
years. Indeed, in a revenue-generating business that involved thousands of transactions,
allowing consistent and unusually favorable foreign exchange rate spreads that resulted in much
larger than normal profits can only have been possible without these controls. Professor Riehl
further opined that such a breakdown in controls could only have occurred with the full
knowledge and concurrence of the Bank's most Senior Management, including Defendants
Logue (CEO) and Resch (CFO).
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
79. As discussed above, during the Class Period, State Street administered four asset-
backed commercial paper Conduits with an aggregate total asset value ranging from $23 billion to $28 billion. These Conduits were off-balance sheet special purpose entities that raised money
by issuing commercial paper that State Street marketed and sold to its institutional clients. The
29 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 35 of 114
Conduits used the proceeds from the sale of commercial paper to purchase mortgage-backed
securities and other assets. According to Moody's Investor Service, in the third quarter of 2008,
State Street was the sixth-largest administrator of asset-backed commercial paper in the United
States
80. State Street also managed a large portfolio of investment securities for its own
benefit during the Class Period. According to the Company's public filings, its "investment
securities portfolio has many objectives, the foremost of which is to generate maximum returns
with modest duration and credit risk." The overall size of State Street's investment portfolio
increased from approximately $65 billion in 2006 to more than $80 billion at year end 2008.
81. Throughout the Class Period, State Street's Conduits and investment portfolio
each held billions of dollars in highly risky real-estate mortgage backed securities ("RMBS").
RMBS are securities that receive their cash flows directly through "pools" of thousands of
residential and commercial mortgages, and can be secured by three types of underlying
mortgages. The first, called "A-paper" mortgages, are the highest rated and are issued to
homeowners who have the strongest credit. The second, known as "Alt-A" mortgages, are sold to borrowers that have much lower credit scores and are required to put forward less
documentation than borrowers seeking "A-paper" mortgages. The lowest rated mortgages are
called "subprime," which are issued to borrowers who have extremely low credit scores and
generally require the borrower to submit almost no documentation.
82. At all relevant times, the majority of the assets in State Street's Conduits were
real-estate mortgage-backed securities collateralized by Alt-A loans. For instance, as of the first
quarter of 2008, $15.5 billion of the total $28.3 billion (nearly 55%) of Conduit assets were
contained in these RMBS investments, and this percentage was never lower than 53% at any
30 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 36 of 114
point during the Class Period State Street disclosed that "most" of the RMBS assets owned by the Conduits were collateralized by "floating rate, Alt-A loans."
83. State Street's investment portfolio also had a significant portion of its assets in
RMBS, including a material amount in toxic subprime mortgages. At year-end 2008, more than
$25 billion (out of a total of $80 billion) of State Street's investment portfolio consisted of real-
estate mortgage backed securities. Signifiantly, between the third quarter of 2007 and the fourth
quarter of 2008, State Street's investment portfolio contained between $5.8 billion and $6.6
billion in subprime mortgages — the riskiest and mostly likely to default of all residential
mortgages.
84. Beginning no later than 2007, State Street's Conduits and investment portfolio
began to come under intense scrutiny from analysts and investors. This scrutiny was prompted
by a sharp deterioration in the residential mortgage and credit markets, which had led to an
alarming increase in defaults and delinquencies in real-estate mortgage backed securities,
particularly those collateralized by Alt-A and subprime mortgages.
85. The collapse of the housing market began in late 2005 as interest rates increased
and the homebuilding market weakened. By early 2006, the signs of a severe housing downturn
were readily apparent. Housing sales were on the decline while default and delinquency rates
were starting to spike. By early 2006, U.S. home prices, which had been increasing at an
unprecedented pace in the early 2000s, slowed their growth and then fell precipitously in 2006.
86. The collapse of the housing market negatively impacted the quality of the
mortgages underlying RMBS securities, including those contained in State Street's Conduits and
investment portfolio. In the third quarter of 2006, Moody's Investors Service ("Moody's")
noted: "loans securitized in the first, second and third quarters of 2006 have experienced
31 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 37 of 114
increasingly higher rates of early default than loans securitized in previous quarters." By June
2007, Moody's was reporting on a "pattern of serious delinquencies" in these mortgages. The
percentage of underlying mortgages in delinquency by 30-59 days in the RMBS markets as of
2006 was 1%. This figure had doubled by the end of 2006 and tripled by summer 2007.
1. Despite the Devastatin2 Downturn in the Housin2 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
87. By early 2007, market observers and research analysts alike were linking the
decline in housing prices, rising interest rates, and increasing defaults directly to a weakening of the RMBS markets. The risk posed to State Street as a result of its exposure to weakening
RMBS securities became the subject of intense investor concern. As a result, during each
quarter from April 2007 forward, Defendants were asked to address these issues in their
quarterly earnings release and on conference calls with investors.
88. In the Company's public filings and on conference calls, Defendants consistently
assured the market that the Conduit and investment portfolio assets were "high quality,"
performing well, and posed no risk to State Street. For instance, on a conference call on April
17, 2007, an analyst questioned Defendants about the subprime investments in the Company's
investment portfolio, asking, "[H]ow do you feel about their credit quality right now?"
Defendant Resch responded "we feel very comfortable with where we are in terms of our asset
backed position overall and the related position that is backed by the subprime mortgages."
89. Similarly, in the next quarter's conference call, on July 17, 2007, Defendant
Resch stated.
Last quarter I was asked about our asset-backed securities in the investment portfolio that are backed by subprime mortgages. Since there has been continuing interest in that subject, let me add some color. . . . . [these securities] have performed very well . .. we are very comfortable in terms of our entire asset
32 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 38 of 114
backed position, as well as the position that is backed by the sub prime mortgages. We don't expect any significant negative financial outcomes due to this element of our investment portfolio
90. On a conference call on October 16, 2007, Defendant Logue stated "[Wie do not
have concerns as to the overall quality of the underlying assets in the conduits," which he
described as, "high quality."
2. Over the Next Year, As The Housing And Financial Markets Collapse, Defendants Continue To Assure Investors That State Street Is Not Materially Impacted
91. Between October 2007 and October 2008, the collapse of the real estate markets
had developed into a global financial meltdown that materially impacted and devasted some of the largest financial institutions in the world.
92. On October 5, 2007, Merrill Lynch announced that it was writing down $5.5
billion of its subprime exposure, a number that it increased to $8.4 billion three weeks later On
November 5, 2007, Citigyoup disclosed that its subprime holdings were permanently impaired by
$11 billion. On November 9, 2007, Treasury Secretary Hank Paulson expressed alarm about the
dangers posed by the deteriorating housing market, stating: "the housing decline is still unfolding
and I view it as the most significant risk to our economy."
93. As discussed in greater detail below, these precipitous declines in the housing
market also led to the collapse of a number of asset-backed commercial paper programs, called
SIVs, which were substantially similar, if not identical, to State Street's Conduits. Just like the
Conduits, SIVs are off-balance sheet entities created by a financial institution. SIVs raise money
by issuing commercial paper and then using the proceeds from the commercial paper to purchase
mortgage-backed and other securities to generate income and repay the commercial paper.
94. On January 16, 2008, Ambac Financial Group — the world's largest insurer for
municipal bonds — announced that it was taking $5.5 billion in write-downs on its $29 billion
33 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 39 of 114
portfolio of RMBS, including a $1.1 billion permanent impairment charge. Two days later, on
January 18, 2008 Fitch Ratings downgraded Ambac Financial Group from "AAA" to "AA." The
New York Times reported that this downgrade would have "threatened to send financial services
firms further into a tailspin" because bond insurers like Ambac were "the lynchpin holding together valuations of portfolios of all kinds of financial institutions."
95. On March 13, 2008, shares of Bear Stearns, the Country's fifth-largest investment
bank, dropped 17% on concerns over Bear Stearns exposure to Carlyle Capital Corporation, a
hedge fund with $22 billion in exposure to real estate mortgage backed securities. On March 14,
2008, Bear Stearns announced that it was suffering a severe liquidity crises and had turned to the
Federal Reserve for an emergency a $25 billion loan. Two days later, on March 16, 2008, Bear
Stearns was acquired in a fire sale by JP Morgan for $2 per share, a stunning 93% decline in the
value of the company's shares from just three days earlier. The acquisition of Bear Stearns was
supported by the Federal Reserve, which provided a $30 billion loan to help finance the
purchase.
96. On July 16, 2008, Merrill Lynch & Co., the third-largest securities firm in the
United States, took a $9.7 billion write down on its real estate mortgage backed portfolio. On
July 17, 2008, Bloomberg reported that banks and brokers had "taken more than $435 billion of
writedowns and credit losses since the beginning of last year as mortgage-backed securities and
other fixed income assets lost value."
97. On September 7, 2008, the United States Treasury placed the two largest
mortgage securitization companies into Government "conservatorship" in order prevent their
collapse The Federal National Mortgage Association ("Fannie Mae") and the Federal Home
Loan Mortgage Corporation ("Freddie Mac"), owned or guaranteed nearly half of the $12 trillion
34 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 40 of 114
U.S. mortgage market. Because nearly every home mortgage lender and Wall Street Bank relied on Fannie Mae and Freddie Mac to facilitate the operation of the real estate mortgage marked
98. Then, over the weekend of September 15, 2008, in one of the most significant events in United States financial history, Lehman Brothers filed for bankruptcy, wiping out $46 billion in market value overnight. With $619 billion in debt, the bankruptcy filing by the 158 year-old investment banking giant was the largest in history. Given the size of the company and its status as a major financial institution throughout the globe, Lehman's collapse had immediately sent the global financial markets into a tailspin.
99. On the next day, September 16, 2008, the Lehman bankruptcy filing served as the catalyst for the forced sale of Merrill Lynch to Bank of America, which was completed at the insistence of the United States Government in order to avoid another high-profile banking collapse The forced sale of Merrill Lynch narrowly averted the investment banks' collapse following writedowns of nearly $40 billion worth of mortgage-related debt.
100. The day after the Lehman Bankruptcy filing, the Reserve Primary Fund, the country's oldest mutual fund, became only the second mutual fund in history to see its value decline below $1 per share (known as "breaking the buck"), as it suffered hundreds of millions of dollars in losses from exposure to Lehman.
101. On September 16, 2008, the Federal Reserve announced that it had loaned $85 billion to insurance giant American International Group ("AIG") in order to prevent AIG's bankruptcy.
102. The crisis spread to the highest levels of Government on September 19, 2008, when President Bush and U.S. Treasury Secretary Paulsen, along with Federal Reserve
Chairman Ben Bernanke, meet with key legislators to propose a $700 billion emergency bailout
35 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 41 of 114
fund. The fund was designed to prevent a complete economic collapse by purchasing toxic subprime and mortgage assets off the balance sheets of troubled financial institutions. Chairman
Bernanke reportedly told legislators that "Ulf we don't do this, we may not have an economy on
Monday."
103. On September 25, 2008, Washington Mutual, one of the country's largest commercial banks, is seized by the Federal Deposit Insurance Corporation, which sold its banking assets to JPMorganChase for $1.9 billion.
104. On October 3, 2008, President Bush signed the Emergency Economic
Stabilization Act, creating a $700 billion Troubled Asset Relief Program ("TARP") to purchase failing bank assts.
105. October 6-10, 2008 was the worst week for the stock market in 75 years. The
Dow Jones lost 22.1 percent, its worst week on record, down 40.3 percent from its high on
October 9, 2007. The Standard & Poor's 500 index lost 18.2 percent, its worst week since 1933, down 42.5 percent in since its own high October 9, 2007.
106. On October 11, 2008, the Dow Jones Industrial Average capped its worst week ever with the highest single-day volatility in its 112 year history. During this week, the Dow declined 22% amid concerns about the worsening credit crisis and global recession. As of
October 11, 2008, market losses on United States Stocks totaled $8.4 trillion in just one year.
107. On October 11, 2008, the 07, a group of central bankers and finance ministers from the Group of Seven leading economies, met in Washington and agreed to urgent and exceptional coordinated action to prevent the credit crisis from spurring a worldwide depression.
108. On October 14, 2008, the United States invoked the TARP program to inject $250 billion of public money into the US banking system, which was distributed among nine banks,
36 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 42 of 114
including $2 billion to State Street. The nine banks that accept TARP funds are: (1) Bank of
America, (2) JPMorgan Chase, (3) Wells Fargo, (4) Citigroup, (5) Merrill Lynch, (6) Goldman
Sachs, (7) Morgan Stanley, (8) Bank of New York Mellon and (9) State Street.
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"
109. Remarkably, just one day later, on October 15, 2008, amidst the unprecedented
financial turmoil described above, Defendants continued to insist that State Street's investment
portfolio and Conduit program were "high quality" and posed no risk to the Company.
Specifically, in a Form 8-K and press release filed that day, State Street disclosed its financial
results for the third quarter of 2008. In that press release, Defendant Logue stated "as we have
said in the past, the asset quality of both our investment portfolio and the conduit remains high."
Defendant Logue made similar statements on a conference call later that day, assuring investors that these assets "are of high quality." Under relevant accounting rules (discussed below), State
Street would be required to consolidate the Conduits onto its own balance sheet if the Conduits
were to suffer significant losses or experience a significant liquidity event. Defendant Resch
assured investor that consolidation would not be necessary, stating "due to the high quality of the
assets and their performance, we do not currently believe we need to consolidate the conduits."
110. Just three months after Defendants assured investors that State Street's assets
were performing well, investors learned the truth. On January 16, 2009, after the close of the
markets and at the start of the Martin Luther King, Jr. holiday weekend, a lengthy 31-page Form
8-K "updating" the Company's risk factors. These included, among other things, that (a) the
Conduits "expose us to liquidity and interest-rate risk"; (b) if it took a permanent write-down on
its investment portfolio "we would recognize a material charge to our earnings"; and (c) the
"current worldwide recession is likely to adversely affect our business."
37 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 43 of 114
111. Despite attempting to portray these issues as "risk factors," the January 16, 2009
Form 8-K disclosed that many of them had already occurred. For instance, the Form 8-K stated that the Conduit program was experiencing significant liquidity issues that had required State
Street itself to purchase $8.9 billion of the Conduit's commercial paper. In addition, the Form 8-
K disclosed that deteriorating market conditions had caused aggregate unrealized losses in the
Conduit and investment programs to increase from the $5.4 billion disclosed on October 15,
2008 to $9.1 billion (as discussed below, on January 20, 2009, State Street disclosed that these
net unrealized losses were actually $9.9 billion).
112. Analysts were shocked by these disclosures. In fact, an analyst from the firm
Ladenberg Thalmann took the unusual step of releasing a critical report on the Martin Luther
King, Jr. holiday, January 19, 2009, stating: Tit is chastening to read this 31 page document
which relates all of the fashions in which this company can lose its investors money. Releasing
it at this time may protect the company but it certainly reinforces the fact that in this stock it is
caveat emptor." The analyst went on to state that the risk factor relating to the Conduits was "a
blockbuster" because:
For two years now investors have argued that State Street must consolidate its off- balance sheet conduits . . . The company has always taken the position that this development is not expected. The new risk factor raises the question as to whether it has changed its mind on this issue and that consolidation may occur sooner rather than later[ ]
113. On January 20, 2009 — the first trading day after the January 16, 2009 disclosures
— State Street filed a Form 8-K stating:
[U]nrealized mark-to-market losses in the investment portfolio increased to $6.3 billion . . . . up $3.0 billion from September 30, 2008, and in the State Street- administered asset-backed commercial paper conduits increased to $3.6 billion_up $1.4 billion from September 30, 2008.
38 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 44 of 114
114. Thus, aggregate unrealized losses in State Street's Conduit program and investment portfolio had increased by $4.4 billion to an astounding $9.9 billion, in the three months since Defendants Logue and Resch had assured investors that these assets were "high quality" and posed no risk. An analyst from RBC described the losses as "very, very substantial."
115. The market reacted to these disclosures with a massive sell-off of State Street's stock, which plummeted almost 60% in a single trading day, wiping out nearly $8 billion in market capitalization. In response, every major credit rating agency downgraded the Company.
As one analyst stated in a report issued on January 21, 2009, "the Company's credibility, as measured by its stock price change, has been dramatically weakened."
4. Defendants' October 15, 2008 Statements Were Knowinply or Recklessly False
116. Defendants' statements on October 15, 2008, as detailed above, were intentionally false and misleading. At the time they made those statements, Defendants Logue and Resch knew, or at a minimum, recklessly disregarded the truth about the losses in the Conduits and investment assets. Indeed, it is not plausible to assume that the $4.4 billion increase in net unrealized losses disclosed in January only materialized in November and December 2008.
Moreover, there is no question that defendants had extensive knowledge about the Conduits and investment program, given the intensive investor questions of them and their repeated assurances regarding the supposed quality of the assets. Accordingly, at minimum it was reckless for these
Defendants to state that these assets were "high quality" on October 15, 2008, when they were experiencing billions of dollars in losses.
117. Indeed, these Defendants had access to information demonstrating that the assets in the investment portfolio and Conduits were far from "high quality" by the third quarter of
39 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 45 of 114
2008. As discussed above, Defendants have never disclosed the specific securities in the
Conduit program or investment portfolio. This information is peculiarly in the possession and
control of Defendants and Lead Plaintiffs expect that discovery will yield additional information
regarding the identity of other troubled companies in State Street's portfolio. Nonetheless, Lead
Plaintiffs' investigation has revealed that the Conduits contained investments in significantly troubled companies that had an extremely high risk of default as of October 15, 2008. These
included:
118. New Century Financial Corp. New Century Financial Corp. ("New Century")
was an originator of subprime loans that filed for bankruptcy on April 2, 2007. According to
public filings made by New Century, State Street's "Galleon" Conduit owned at least $100
million of New Century securities.
119. Washington Mutual. Washington Mutual was a savings and loan that extended
numerous subprime mortgages during the height of the real estate boom. According to CW 7, a
Department Liability Manager for State Street from 1998 through the end of 2007, State Street's
Conduit program had extensive exposure to Washington Mutual. Starting on October 17, 2007,
Washington Mutual began to disclose significant losses as the real estate markets declined. On
March 3, 2008, Fitch Ratings downgraded $2.3 billion of securities issued by Washington
Mutual because, "[T]he deteriorating performance of [WaMu's] pools from 2007, 2006 and late
2005 with regard to continued poor loan performance" On September 26, 2008, Washington
Mutual filed for bankruptcy.
120. Countrywide Financial. Countrywide was an originator of Alt-A and subprime
loans, which suffered huge losses in 2007 and was forced into an emergency sale in order to
40 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 46 of 114
avoid bankruptcy. According to CW 7, State Street's Conduit program had extensive exposure to Countrywide.
121. IndyMac Mortgage Services. IndyMac was the Country's largest Alt-A lender in
2006. According to CW 7, State Street's Conduit program had extensive exposure to IndyMac.
On Augus 2, 2007, Moody's downgraded IndyMac to reflect "collateral weaknesses that have
surfaced in Alt-A pools securitized in 2006." On July 11, 2008, IndyMac was placed into
conservatorship by the FDIC.
122. Defendants were, or should have been, aware of State Street's exposure to these troubled companies (and others) through the "rigorous credit review" process implemented at the
Company. According to State Street's SEC filings, the Conduits were subject to "significant
internal controls," including a "dedicated surveillance team responsible for monthly monitoring
of asset performance, "robust liability management, including economic and market updates, and
weekly management meetings." Defendants had an obligation to familiarize themselves with this information before making statements on conference calls and in SEC filings about the
quality of State Street's Conduit and investments assets.
123. Indeed, Lead Plaintiffs' investigation has revealed that prior to Defendants'
statements on October 15, 2008, there were plans within State Street to consolidate the Conduits
on the Company's balance sheet. CW 6, a Senior Vice President at State Street responsible for
risk management from 2008 through 2009, stated that in September 2008 CW 6 learned of
internal reports on the financial condition of the Conduits that indicated there were "problems"
with the Conduits. CW 6 also understood that the risk management system he was helping to
build in 2008 was supposed to accommodate the Conduits as well because State Street already
anticipated at that time that the Conduits would be brought onto the Company's balance sheet.
41 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 47 of 114
124. Other information in Defendants' possession did, or should have, alerted them to the falsity of their October 15, 2008 statements. For instance, while Defendants claimed on
conference calls that many of the assets in the Conduits had high ratings and were not in
payment default, they knew that these facts (even if true) could not prevent significant losses. As
Defendants knew or should have known, between August 2007 and March 2008, at least thirteen
"SIVs," which are commercial paper conduits similar to State Street's Conduits, had either
collapsed or required billions of dollars in "bail outs" from their sponsor banks (Citigroup's SIVs
are discussed above). These included SIVs that had high ratings from the major credit agencies
and were not experiencing any payment defaults. For instance, Whistlejacket Capital Ltd. was
an SIV that collapsed on February 12, 2008 despite being rated Aaa by Moody's and
experiencing no credit defaults. As one market observer stated "this implosion was purely
driven by market value pressures." Other examples include (i) Centauri Corp., a $21 billion SIV that required $8 billion of emergency funding on November 6, 2007 even though it had an Aaa
rating from Moody's; and (ii) K2 Corporation, a $31.2 billion SIV that issued commercial paper,
which had to be rescued by its financial sponsor on February 21, 2008 when its assets declined
by nearly 50% despite having no exposure to subprime mortgages and 90 percent of its assets
being rated triple-A or double-A, which prompted one analyst to state "the SIV business model is
now permanently broken." The failures of these programs that were similar to State Street's
Conduits should have been a red flag to Defendants alerting them to the possibility that the assets
in State Street's Conduit program were overvalued.
125. Defendants also had a strong motive to conceal significant losses in the third
quarter of 2008. Specifically, Defendants Logue and Resch were motivated to ensure that State
Street survived the financial turmoil and uncertainty following the collapse of Lehman Brothers.
42 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 48 of 114
If State Street had recognized the full extent of its losses in October 2008, it would have taken a tremendous financial hit, including an extraordinary pre-tax loss of approximately $6.1 billion.
Moreover, the Company's primary capital ratio, its Tangible Common Equity ("TCE") ratio,
would have been dangerously low. A TCE ratio measures how much loss a bank can absorb
before its shareholder equity is wiped out. It is an important metric for financial institutions
because regulators use it to assess whether an institution is adequately capitalized. Had State
Street recognized its losses in the Conduits in the third quarter of 2008, the Company's TCE
ratio would have declined from 4.8% to just 3.05%. This would have been dangerously close to the 3.0% level that government regulators view as the minimal level for bank safety.
126. In the uncertain financial markets existing on October 2008, Defendants knew that the disclosure of a $9.9 billion dollar loss, and a massive reduction in the Company's TCE
ratios would have had disastrous consequences to State Street. Indeed, such a disclosure at that time could easily have led to a bankruptcy filing or even a Government seizure of the Company.
Rather than take this risk, Defendants chose to mislead the market by assuring investors that the
Company's assets were "high quality" and posed no risk to the Comany. By the time the truth
was revealed in January 2009, the turmoil in the financial markets had settled sufficiently such that, while State Street's stock plummeted an astonishing 60%, the Company's survival was no
longer at stake.
VI. DEFENDANTS' GAAP VIOLATIONS
A. Defendants' GAAP Violations
127. State Street, in reporting its financial results during the Class Period, made
numerous untrue statements of material fact and omitted to state material facts necessary to
make its reported financial position and results not misleading. As set forth below, State Street
published financial information that violated generally accepted accounting principles
43 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 49 of 114
("GAAP") and SEC Regulations prohibiting false and misleading public disclosures. As explained below, GAAP required that State Street consolidate its Conduits no later than
September 30, 2009 because State Street was exposed to the majority of the Conduits' losses
(which were increasing quarter-by-quarter), but State Street kept its Conduits off its balance sheet until May 15, 2010.
1. Background And Gaap Standards Applicable To The Conduits
128. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practices. The SEC has the statutory authority to promulgate GAAP for public companies, and has delegated that authority to the Financial Standards Accounting Board ("FASB").
129. The SEC requires public companies to prepare their financial statements in accordance with GAAP. In fact, as set forth in SEC Regulation S-X (17 C.F.R. § 210.4-
01(a)(1)), financial statements filed with the SEC that are not presented in accordance with
GAAP will be presumed to be misleading, despite footnotes or other disclosures. SEC
Regulation S-X (17 C.F.R. § 210.10-01(a)(5)) also requires that interim financial statements comply with GAAP and "shall include disclosures either on the face of the financial statements or in accompanying footnotes sufficient so as to make the interim information presented not misleading."
130. In December 2003, in response to Enron's use of off-balance sheet vehicles to hide liabilities, the Financial Accounting Standards Board ("FASB") issued a revision to its
Interpretation No. 46 ("FIN 46(R)"), Consolidation of Variable Interest Entities. This guidance is an interpretation of Accounting Research Bulletin No. 51 and addresses the consolidation of business enterprises that are variable interest entities.
44 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 50 of 114
131. A "variable interest entity," or "VIE," refers to an entity subject to consolidation
according to the provisions of FIN 46(R). Under FIN 46(R), a "variable interest" is a
contractual, ownership, or other pecuniary interests in an entity that is subject to change "in
response to changes in the fair value of the entity's net assets exclusive of variable interests."
Equity interests (either with or without voting rights) are considered variable interests if (1) the
entity is a variable interest entity and (2) the equity investment may be at risk.
132. FIN 46(R) requires that a company consolidate a VIE if the company is a
"primary beneficiary" of the VIE, meaning that the company's variable interests can result in the company absorbing a majority of the VIE's expected losses, receiving a majority of the
VIE's expected residual returns, or both.
2. State Street Failed To Consolidate Its Conduits When Required To Do So By Gaap
133. During the Class Period, State Street acknowledged that the Conduits qualified
as variable interest entities and were subject to the provisions of FIN 46(R). However, State
Street maintained the Conduits "off balance sheet" until May 15, 2009 even though it admitted that it had significant obligations with respect to the Conduits, which included:
• Contractual obligations to purchase some or all of the portfolio assets from the Conduits at a contracted price — which could be higher than their actual market value — in the event that the Conduits were unable to issue sufficient commercial paper to meet their ongoing liquidity needs; • Contractual obligations to purchase some or all of the portfolio assets under circumstances other than those noted above, such as a downgrade of the credit rating of securities held by the Conduits; • Providing credit enhancement to the Conduits in the form of standby letters of credit; • Purchasing commercial paper from the Conduits.
134. The Company's conclusion until May 15, 2009 that it was not the "primary
beneficiary" of the Conduits was purportedly based on cash flow analyses concerning the
45 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 51 of 114
Conduits' assets performed by Defendants State Street reasoned that since the Conduits issued
subordinated first-loss notes to outside investors, those investors — and not State Street — would
absorb the majority of the Conduits' losses; therefore, the first-loss note holders were identified
as the primary beneficiaries of the Conduits. 3 However, this conclusion was flawed because, no
later than the third quarter of 2008, State Street's obligations to absorb the Conduits' losses far
exceeded the obligations of the holders of the first-loss notes. As explained below, no later than
September 30, 2009, it was apparent to defendants that State Street was responsible for the
majority of the Conduits' skyrocketing losses, and therefore Consolidation was required.
135. In response to increased risk of losses in its Conduits, Street acknowledged that the Conduits twice had to issue additional first-loss notes in the first half of 2008: (1) in the
amount of $20 million in the first quarter of 2008, and (2) in the amount of $15 million in the
second quarter of 2008. The issuance of those additional first-loss notes signified that State
Street recognized that the Conduits were increasingly exposing their interest holders (and in
particular, State Street) to losses. Indeed, during the first half of 2008, the aggregate value of the first-loss notes had increased by a total of $35 million, while the total assets held by the
conduits decreased by $40 million, indicating that a higher amount of first-loss notes were
needed to cover fewer total assets held by the Conduits.4
3 For example, in its 2007 Form 10-K, State Street explained that: Any credit losses of the conduits would be absorbed by (1) investors of the subordinated debt, commonly referred to as "first-loss notes," issued by the conduits; (2) State Street; and (3) the holders of the conduits' commercial paper, in order of priority. The investors in the first-loss notes, which are independent third parties, would absorb the first dollar of any credit loss on the conduits' assets. If credit losses exceeded the first-loss notes, we would absorb credit losses through our credit facilities provided to the conduits. The commercial paper holders would absorb credit losses after the first-loss notes and State Street's credit facilities have been exhausted. 4 State Street would not have caused the Conduits to issue these first-loss notes absent compelling evidence of increasing risk in the Conduits. Indeed, by causing the Conduits to issue
46 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 52 of 114
136. After the first and second quarters, however, the losses in the Conduits continued to increase significantly, as illustrated below:
Period End 4Q07 1Q08 2Q08 3Q08 4Q08 (12/31/2007) (3/31/2008) (6/30/2008) (9/30/2008) (12/31/2008) After-Tax, Unrealized Conduit $530 $1,490 $1,630 $2,140 $3,560 Losses (in millions)
137. However, State Street did not increase the Conduits' first-loss note protection
after the second quarter of 2008, even though the losses in the conduits were increasing, and, as
alleged herein, State Street knew that trend would continue, and in fact worsen.
138. Rather, recognizing that the funds provided by the first-loss notes were
insufficient to prevent the Conduits from failing, State Street began buying record amounts of
its own commercial paper — which it kept on its books State Street's increasing and massive
purchases of the Conduits' commercial paper to provide liquidity to its Conduits during the
Class Period — which jumped by over $7 billion, from a peak of $1.96 billion in the second
quarter of 2008 to a massive $9.2 billion the third quarter of 2008 (and an equally massive $8.8
billion during the fourth quarter) — are illustrated below:
additional first-loss notes, the Conduits would become less profitable for State Street (as first- loss notes pay out at a high rate, since they are subject to the first losses — thereby cutting into the "spread" from which State Street received its fees), but State Street could claim that there was a greater third-party "cushion" to absorb the Conduits' losses.
47
Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 53 of 114
Statein mSetnrtee hiatp'sPeak conDudul2 cstoantesitr au t ec ect,s nm ievr.e ct e pna p
( 0111 per t per Period Period (in millions) At Period End (in millions) 1Q08 Vol sc °sect $292 (3/31/2008) 4/30/2008 Not eh scloyed $1,180 2Q08 $1,960 $212 (6/30/2008) 3Q08 $9 220 $7,820 (9/30/2008) 4Q08 $8 890 $230 (12/31/2008)
139. Under these circumstances, where State Street was both explicitly
acknowledging its various responsibilities to act as a backstop for losses in the Conduits and
implicitly guaranteeing additional support by purchasing huge amounts of the Conduits'
commercial paper, GAAP required State Street to consolidate the Conduits. As FASB member
Tom Linsmeier was quoted as saying in an October 24, 2007 article titled, "Citigroup SIV
Accounting Looks Tough to Defend":
If a bank sponsor in deteriorating credit markets feels it is necessary in order to protect its reputation to provide an implicit guarantee of additional support to a VIE, and that additional support would make it the party that is expected to absorb the majority of losses, then the bank sponsor should be consolidating the VIE.
140. The reason for State Street's refusal to consolidate when required by GAAP is
apparent: doing so would have caused a material, negative impact to State Street's capital
ratios, including its Tangible Common Equity ratio ("TCE"). These ratios were important
metrics to securities analysts and the market, as they were indicators of State Street's financial
health and viability — which had become a subject of intense interest in the market give the
failures of many other financial institutions with exposure to asset-backed securities.
48 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 54 of 114
141. TCE is used as a tool to measure risk levels in banks. Specifically, TCE
determines the amount of loss a bank can absorb before shareholder equity is wiped out.
According to a Wall Street Journal article titled, "U.S. Eyes Large Stake in Citi," dated
February 23, 2009, government regulators view a 3% TCE as the minimum level for bank
safety. Had State Street consolidated its Conduits as of the third quarter of 2008, the outside
date when GAAP required it to do so, its TCE would have fallen from 4.8% to just 3.05%, or on the razor's edge of the minimum acceptable level. Even more significantly, had consolidation
occurred at that point, at the end of the next quarter (the fourth quarter of 2008), State Street's
TCE would have been a mere 1.19%, well below the 3% level and even lower than the 1.5%
TCE at Citigroup that sufficiently alarmed regulators to plan for additional capital infusions into
Citigroup in February 2009, according to the Wall Street Journal.
142. Moreover, had State Street not been able to raise capital through its June 2008
Offering, its TCE would have been even lower, and clearly would have been next to zero if it
had not raised capital and also consolidated the Conduits in the third quarter of 2008. Indeed,
prior to the June 2008 Offering, as of March 31, 2008, State Street's TCE had fallen to 2.92%;
by the end of June 2008 — thanks to the capital infusion from the June 2008 Offering — it had
increased to 5.4%. As noted above, by the third quarter of 2008, State Street's TCE had fallen to 4.8%, even with the benefit of the capital that had been infused into State Street via the June
2008 Offering. Without the benefit of the capital from the June 2008 Offering, State Street
would have faced ruin. Thus, rather than follow GAAP and consolidate the Conduits, State
Street chose to ignore its status as the "primary beneficiary" of the Conduits as of no later than the third quarter 2008 so that the Company could maintain an appearance of being well-
capitalized.
49 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 55 of 114
VII. ADDITIONAL ALLEGATIONS CONFIRMING SCIENTER
143. Defendants Logue and Resch also had both motive and opportunity to perpetrate fraud. According to State Street's proxy statements from the years 2006 through 2007, the
Officer Defendants' incentive-based pay was based largely on achieving certain financial performance measures, including, among others: (a) increasing State Street's revenue; (b) increasing State Street's earnings per share; and (c) increasing State Street's return on equity.
As a result of meeting these benchmarks, Defendants Logue and Resch received substantial bonuses in 2006 and 2007 (no year-end bonuses were paid in 2008 because State Street took $2 billion in TARP funds that year). Defendant Logue received $8.75 million in bonuses ($5 million in 2006, $3.75 million in 2007), and Defendant Resch received $3 million ($1.7 million in 2006, $1.2 million in 2007).
144. Moreover, these Defendants' overall compensation during the Class Period was extremely high. In fact, Logue was the second highest paid Chief Executive in the state of
Massachusetts. These Defendants received total compensation as follows:
Officer 2006 2007 2008 Total Defendant Compensation Compensation Compensation Compensation Logue $26,757,510 $28,344,955 $28,712,475 $83.8 million
Resch $6,414,092 $6,592,667 $11,448,094 $24.5 million
145. Moreover, Defendant Logue's knowledge or recklessness with regard to the foreign exchange trading fraud is demonstrated by his experience overseeing State Street's foreign exchange trading desk. From 2001 to 2004, as the foreign exchange fraud was ongoing,
Logue was the Chief Operating Officer of State Street State Street's public filings described
Logue's responsibilities as COO to include overseeing the Company's "trading activities, as
50 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 56 of 114
well as information technology." According to State Street's disclosures, as COO Logue had
oversight over State Street's trading desk, including foreign exchange trading.
VIII. ADDITIONAL FALSE AND MISLEADING STATEMENTS
146. In addition to the materially false and misleading statements and omissions
detailed above, State Street and the Officer Defendants made the following additional false and
misleading statements and omissions during the Class Period.
A. False and Misleading Statements Relating To 2006 Results
1. Statements Regarding Foreign Exchange Operations
147. On October 17, 2006, State Street issued a press release titled, "State Street
Corporation Achieves Third Quarter EPS up 11% on Revenue Gain of 9% Driven by Solid
Performance in Servicing and Management Fees Compared to 2005 Expenses Decline 7% from
Second Quarter of 2006," which stated.
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fees is $171 million for the quarter, down 3% from $176 million in an unusually strong quarter a year ago. Excluding the cumulative gain, trading services revenue would be down 11%. The decrease is driven by weaker brokerage volumes, as well as lower FX volatility.
148. In the October 17, 2006 press release, Defendant Logue attributed the declines in trading services to "seasonal declines," but stated that looking forward, "[T]lu-ough nine months
we are performing above the high end of our ranges for revenue, earnings per share, and return
on equity, all on an operating basis excluding the second-quarter tax charges. We expect that
we will moderately exceed the high end of the ranges we established for the full year."
149. On November 3, 2006, State Street filed its Form 10-Q for the Third Quarter of
2006, which was signed by Defendant Resch. The Form 10-Q made the following statement
regarding State Street's foreign exchange revenue:
51 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 57 of 114
Foreign exchange trading revenue totaled $113 million, down 7% compared to $121 million in the prior-year quarter, reflecting weaker currency volatilities partly offset by increased customer transaction volumes. Foreign exchange trading revenue totaled $470 million, compared to $348 million, up 35% in the nine-month comparison, reflecting higher volumes and a favorable transaction mix, partly offset by a decline in volatilities.
150. The Third Quarter 2006 Form 10-Q also made affirmative statements concerning
State Street's responsibilities to its custody clients:
In the normal course of business, we hold assets under custody and management in a custodial or fiduciary capacity. Management conducts regular reviews of its responsibilities in this regard and considers the results in preparing the consolidated financial statements. In the opinion of management, no contingent liabilities existed at September 30 2006 that would have had a material adverse effect on State Street's consolidated financial position or results of operations.
151. On January 17, 2007, State Street held a conference call to discuss the
Company's 2007 fourth quarter and year-end results, during which Defendant Resch stated that:
"Increased volumes and improved customer mix partially offset by weaker volatility drove an
18% increase in foreign exchange. Foreign exchange trading revenue was up $21 million to
$141 million. Brokerage and other fees were flat from the previous year's fourth quarter."
152. That same day, State Street issued a press release entitled, "State Street Reports
Fourth-Quarter Earnings Per Share of $.86, up 16%; for 2006, Revenue up 15%; EPS from
Continuing Operations up 14% and up 23% Excluding Q2 Tax Charges." The press release stated, in relevant part "State Street Corporation today announced 2006 fourth-quarter earnings per share of $0.86 on net income of $291 million. Earnings per share increased 16% versus the
2005 fourth quarter's results of $0.74 per share on net income of $249 million. Total revenue of
$1.622 billion in the fourth quarter of 2006 is up 15% from $1.416 billion in the fourth quarter a year ago."
153. The Press Release quoted Defendant Logue as stating:
52 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 58 of 114
I'm pleased that we exceeded the financial goals we set for the year, helped by a favorable operating environment. Nearly every revenue item on our income statement increased in double digits on a year-over-year basis, and we achieved positive operating leverage again this year. . . Our strategy of more actively managing the balance sheet contributed to an annual increase of 21% in fully taxable-equivalent net interest revenue. Net interest margin equaled 1.24% for 2006. Additionally, our non-U.S. revenue now represents approximately 43% of total revenue, in line with our long-term goal of 50% over several years.
154. On February 20, 2007, State Street filed its Annual Report with the SEC on Form
10-K for the 2006 fiscal year. The Company's Form 10-K was signed by Defendants Logue and Resch, and reaffirmed the Company's financial results previously announced on January
17, 2007. In addition, the 2007 Form 10-K provided additional information on the foreign exchange revenues:
Trading services revenue includes revenue from foreign exchange trading and brokerage and other trading services. We offer a complete range of foreign exchange services under an account model that focuses on the global requirements of our customers to execute trades and receive market insights in any time zone. . . . Foreign exchange trading revenue is influenced by three principal factors: the volume and type of customer foreign exchange transactions; currency volatility and trend; and the management of currency market risks.
For 2006, foreign exchange trading revenue increased 31%, to $611 million from $468 million in 2005, and benefited from a strong first half of the year. The increase from 2005 resulted from increased transaction volumes, a favorable transaction mix related to custody FX services, and an increase in FX trading profits, partially offset by a decline in customer volume-weighted currency volatility.
155. The 2007 Form 10-K also made affirmative statements concerning State Street's responsibilities to its custody clients:
In the normal course of business, we hold assets under custody and management in a custodial or fiduciary capacity. Management conducts regular reviews of its responsibilities in this regard and considers the results in preparing the consolidated financial statements. In the opinion of management, no contingent liabilities existed at December 31 2006 that would have had a material adverse effect on State Street's consolidated financial position or results of operations.
53 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 59 of 114
156. The statements set forth above were materially false and misleading for at least the following reasons:
a. State Street's wrongful overcharging of its custody clients had been ongoing since at least 2001, as described above in fi44-66;
b. the Company was overcharging its institutional clients by hundreds of millions of dollars for executing their foreign exchange trades, as described above in fi68-71;
c. these activities had materially inflated the Company's reported financial results, causing material inflation of the Company's revenue and net income, as described above in tt68 -71; and
d State Street lacked adequate internal controls over its financial reporting and foreign exchange operation, as described above in fi72-78.
2. Statements Regarding Internal Controls
157. On November 3, 2006, State Street filed its Quarterly Report with the SEC on
Form 10-Q for the 2006 fiscal third quarter. The Company's Form 10-Q was signed by
Defendants Resch and Gormley and reaffirmed the Company's financial results previously
announced on October 17, 2006. The Company's Form 10-Q also contained Sarbanes-Oxley-
required certifications, signed by Defendants Logue and Resch, which stated, in relevant part:
I have reviewed this quarterly report on Form 10-Q of State Street Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
54 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 60 of 114
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; * * *
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
158. On February 20, 2007, State Street filed its Annual Report with the SEC on Form
10-K for the 2006 fiscal year. The Company's Form 10-K contained Sarbanes-Oxley certifications, signed by Defendants Logue and Resch, certifying, inter alia, that they had reviewed the Form 10-K and, to their knowledge the (i) report did not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and (ii) the financial statements and other financial information included in the report fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report.
55 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 61 of 114
159. The statements set forth above were materially false and misleading for at least the following reasons:
a. State Street's wrongful overcharging of its custody clients had been ongoing since at least 2001, as described above in fi44-66;
b. the Company was overcharging its institutional clients by hundreds of millions of dollars for executing their foreign exchange trades, as described above in fi68-71;
c. these activities had materially inflated the Company's reported financial results, causing material inflation of the Company's revenue and net income, as described above in tt68 -71; and
d State Street lacked adequate internal controls over its financial reporting and foreign exchange operation, as described above in fi72-78.
B. False and Misleading Statements Relating To 2007 Results
1. Statements Regarding Foreign Exchange Operations
160. On April 17, 2007, State Street issued a press release entitled, "State Street
Corporation Achieves Record Revenue of $1.7 Billion and EPS of $.93 in the First Quarter,
Both up 11% versus Year-Ago Quarter." The press release stated "Net income of $314 million
for the quarter is up 11% from income from continuing operations of $282 million for the year-
ago quarter. For the first quarter of 2007, return on shareholders' equity was 17.4% compared to
17.6% from continuing operations in the first quarter of 2006." The press release quoted
Defendant Logue as saying:
We continue to grow our revenue and earnings per share and generate return on equity consistent with our long-term goals . . . Our net interest revenue and net interest margin continue to benefit from a favorable mix of customer deposits, especially from non-US customers. Trading services revenue declined moderately as foreign exchange markets were not as robust as they were in last year's first quarter, which, as we stated at the time, were unusually strong.
56 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 62 of 114
161. On May 4, 2007, State Street filed its Quarterly Report with the SEC on Form
10-Q for the 2007 fiscal first quarter. The Company's Form 10-Q was signed by Defendant
Resch and reaffirmed the Company's financial results previously announced on April 17, 2007.
The Company's Form 10-Q also made the following statement regarding State Street's foreign exchange revenue:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, was down 4% for the first quarter compared to the same period in 2006. Foreign exchange trading revenue totaled $152 million, down 8% from $165 million in the prior-year quarter, which was unusually strong. The decrease reflected lower currency volatility partly offset by an increase in customer volumes, mostly in foreign exchange trading and sales transactions, although customer volumes in custody foreign exchange also increased.
162. The Form 10-Q also made affirmative statements concerning State Street's responsibilities to its custody clients: "In the normal course of business, we hold assets under custody and management in a custodial or fiduciary capacity. Management conducts regular reviews of its responsibilities in this regard and considers the results in preparing the consolidated financial statements."
163. On July 17, 2007, State Street issued a press release entitled, "State Street
Corporation Achieves Record Revenue and Operating EPS in Second Quarter." The press release stated, "Revenue of $1.921 billion in the second quarter of 2007 represented a record and is up 16.4%, compared to $1.651 billion in the year-ago quarter." The press release quoted
Defendant Logue as stating:
We are pleased to achieve the eleventh consecutive quarter of positive operating leverage compared to the prior-year quarter. We also continued to benefit from our balance sheet strategy. We achieved 1.64 percent in net interest margin on a 44 percent improvement in fully taxable-equivalent net interest revenue . . . The results of Investors Financial in the second quarter were strong, like State Street's, and so we are revising our financial goals for 2007: We now expect that revenue growth will be between 20 percent and 22 percent; up from 16 percent to 18 percent we forecast in February when we announced the deal.
57 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 63 of 114
*** Trading services increased 18% to $260 million due to strength in foreign exchange volumes and brokerage. Securities finance revenue increased 65%, from $98 million to $162 million, due to improved spreads and seasonally high volumes.
164. On a conference call held that same day, Defendant Resch provided further detail to investors regarding income from State Street's securities lending, trading services and
investment portfolio activities, stating:
Trading services revenue, which includes foreign exchange trading and brokerage and other services, was up about 1% to $260 million. Weaker volatility, partially offset by stronger volumes drove a 9% decline in foreign exchange trading revenue. Foreign exchange trading revenue was down $18 million to $174 million compared with a record quarter in 2006.
165. On August 3, 2007, State Street filed its Quarterly Report with the SEC on Form
10Q for the 2007 fiscal second quarter. The Company's Form 10-Q was signed by Defendant
Resch and reaffirmed the Company's financial results previously announced on July 17, 2007.
166. The Company's Form 10-Q also made the following statement regarding State
Street's foreign exchange revenue:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, was up 1% for the second quarter of 2007 compared to the second quarter of 2006 and down 2% in the six-month comparison. Foreign exchange trading revenue for the second quarter and first six months of 2007 totaled $174 million and $326 million, respectively, both down 9% from $192 million and $357 million in the prior-year periods. The quarterly decrease reflected a 40% decline in currency volatility partly offset by a 13% increase in customer volumes, mostly in foreign exchange for our custody customers. The six-month decrease resulted from a 29% decrease in currency volatility partly offset by an 18% increase in customer volume.
167. The Form 10-Q also made affirmative statements concerning State Street's
responsibilities to its custody clients: "In the normal course of business, we hold assets under
custody and management in a custodial or fiduciary capacity. Management conducts regular
58 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 64 of 114
reviews of its responsibilities in this regard and considers the results in preparing the consolidated financial statements."
168. On October 16, 2007, State Street issued a press release entitled, "State Street
Corporation Reports Third-Quarter EPS up 10% Including Investors Financial Integration
Costs. Record Operating EPS up 39% on Revenue Gain of 48% Compared to 2006." The press release stated.
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fees is $320 million for the quarter, up 87% from $171 million a year ago. The increase is driven by improved volumes and higher FX volatility. Higher brokerage and other fee revenue is due to the impact of the Currenex acquisition, increased transition management, and strong trading volumes.
169. That same day, Defendants Logue and Resch held a conference call with investors to discuss the Company's 2007 third-quarter results. Defendant Logue stated.
While market conditions in the third quarter presented challenges, which I will address in a minute, it also created more opportunities in foreign exchange and in securities finance than we usually expect in the third quarter, which has historically been a softer quarter for these businesses. Revenue from foreign exchange increased 98% from the year ago quarter, and 29% from the second quarter.
170. Defendant Resch echoed that statement: "Unusually strong volatility in our foreign exchange business drove a 98% increase in foreign exchange trading revenue compared with the third quarter of last year, and up 29% from the second quarter."
171. On November 2, 2007, State Street filed its Quarterly Report with the SEC on
Form 10-Q for the 2007 fiscal third quarter. The Company's Form 10-Q was signed by
Defendant Resch and reaffirmed the Company's financial results previously announced on
October 16, 2007. The Company's Form 10-Q also made the following statement regarding
State Street's foreign exchange revenue:
59 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 65 of 114
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, was up 87% for the third quarter of 2007 compared to the third quarter of 2006 and up 21% in the nine-month comparison. Foreign exchange trading revenue for the third quarter and first nine months of 2007 totaled $224 million and $550 million, respectively, up 98% and 17% from $113 million and $470 million in the prior-year periods. The quarterly increase reflected a 55% increase in customer volumes, mostly in foreign exchange trading, the contribution of revenue from the acquired Investors Financial business, and a 9% increase in currency volatility.
172. The Form 10-Q also made affirmative statements concerning State Street's responsibilities to its custody clients: "In the normal course of business, we hold assets under custody and management in a custodial or fiduciary capacity. Management conducts regular reviews of its responsibilities in this regard and considers the results in preparing the consolidated financial statements."
173. On January 15, 2008, State Street held a conference call to discuss the
Company's 2007 fourth quarter and year-end results, during which Defendant Logue commented on State Street's 31% increase in foreign exchange revenue:
While market conditions in the second half of the year presented challenges, it also created more opportunities for overperformance in foreign exchange and in securities finance. Foreign exchange revenue in 2007 was up 31%, and securities finance revenue was up 76%, both compared to 2006.
174. Defendant Resch echoed this performance: "Higher volumes and stronger volatility in our foreign exchange business drove a 79% increase in foreign exchange trading revenue, compared with the fourth quarter of 2006, and up 13% from the third quarter."
175. On January 15, 2008, State Street also issued a press release entitled, "State
Street Reports Fourth-Quarter Earnings Per Share of $.57, Including a Net after-Tax Charge of
$279 Million, or $.71 Per Share." The press release stated.
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fee revenue, is up 73%, from $203 million to $352 million. The increase is driven by improved volumes and higher volatility in foreign
60 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 66 of 114
exchange, as well as an increase in brokerage and other revenue principally due to the acquisition of Currenex in March, 2007.
176. On February 15, 2008, State Street filed its Annual Report with the SEC on Form
10-K for the 2007 fiscal year. The Company's Form 10-K was signed by Defendants Logue
and Resch and reaffirmed the Company's financial results previously announced on January 15,
2008. State Street's 2008 Form 10-K also provided additional information on the foreign
exchange revenues:
We offer a complete range of foreign exchange services under an account model that focuses on the global requirements of our customers to execute trades and receive market insights in any time zone. . . . Foreign exchange trading revenue is influenced by three principal factors: the volume and type of customer foreign exchange transactions; currency volatility; and the management of currency market risks.
For 2007, foreign exchange trading revenue increased 31%, to $802 million from $611 million in 2006, and benefited from the disruption in the global securities markets that occurred in the second half of the year. The increase was mainly driven by a 39% increase in customer volumes, but also was the result of the inclusion of $43 million of foreign exchange revenue from the acquired Investors Financial business. These increases were partly offset by an unfavorable transaction mix influenced by lower margin transactions and a 5% decline in currency volatility.
177. The 2007 Form 10-K for the year ended December 31, 2007 also made
affirmative statements concerning State Street's responsibilities to its custody clients: "In the
normal course of business, we hold assets under custody and management in a custodial or
fiduciary capacity. Management conducts regular reviews of its responsibilities in this regard
and considers the results in preparing the consolidated financial statements."
178. The statements set forth above were materially false and misleading for at least the following reasons:
a. State Street's wrongful overcharging of its custody clients had been ongoing since at least 2001, as described above in tf44 66;
61 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 67 of 114
b. the Company was overcharging its institutional clients by hundreds of millions of dollars for executing their foreign exchange trades, as described above in fi68-71;
c. these activities had materially inflated the Company's reported financial results, causing material inflation of the Company's revenue and net income, as described above in tt68-71; and
d State Street lacked adequate internal controls over its financial reporting and foreign exchange operation, as described above in fi72-78.
2. Statements Regarding Internal Controls
179. On May 4, 2007, State Street filed its Quarterly Report with the SEC on Form
10-Q for the 2007 fiscal first quarter. The Company's Form 10-Q contained Sarbanes-Oxley required certifications, signed by Defendants Logue and Resch, contained the same statements as those set forth in ¶J157-58, above.
180. On August 3, 2007, State Street filed its Quarterly Report with the SEC on Form
10Q for the 2007 fiscal second quarter. The Company's Form 10-Q contained Sarbanes-Oxley required certifications, signed by Defendants Logue and Resch, contained the same statements as those set forth in ¶J157-58, above.
181. On November 2, 2007, State Street filed its Quarterly Report with the SEC on
Form 10-Q for the 2007 fiscal third quarter. The Company's Form 10-Q contained Sarbanes-
Oxley required certifications, signed by Defendants Logue and Resch, contained the same statements as those set forth in ¶J157-58, above.
182. On February 15, 2008, State Street filed its Annual Report with the SEC on Form
10-K for the 2007 fiscal year. The Company's Form 10-K contained Sarbanes-Oxley required certifications, signed by Defendants Logue and Resch, contained the same statements as those set forth in ¶J157-58, above.
62 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 68 of 114
183. The statements set forth above were materially false and misleading for at least the following reasons.
a. State Street's wrongful overcharging of its custody clients had been ongoing since at least 2001, as described above in fi44-66;
b. the Company was overcharging its institutional clients by hundreds of millions of dollars for executing their foreign exchange trades, as described above in fi68-71;
c. these activities had materially inflated the Company's reported financial results, causing material inflation of the Company's revenue and net income, as described above in tt68 -71; and
d State Street lacked adequate internal controls over its financial reporting and foreign exchange operation, as described above in fi72-78.
C. False and Misleading Statements Relating To 2008
1. Statements Regarding Foreign Exchange Operations
184. On April 15, 2008, State Street issued a press release entitled, "State Street
Corporation Achieves Record Revenue of $2.6 Billion in the First Quarter, up 52% from Year-
Ago Quarter." The press release stated.
State Street Corporation announced today first-quarter earnings per share of $1.35, up 45% from earnings per share of $0.93 in last year's first quarter. . . . Revenue of $2.577 billion in the first quarter of 2008, representing a State Street record for a quarter, is up 52% from $1.696 billion compared to the year-ago quarter .. . .
185. The press release quoted Defendant Logue as stating, "I am extremely pleased
with this record revenue performance, particularly in today's challenging environment . . .
Trading services revenue, which includes foreign exchange trading revenue and brokerage and
other fees, is $366 million for the quarter, up 66% from $220 million in the year-ago quarter.
The 74% increase in foreign exchange revenue is due to higher volatility and increased
volumes."
63 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 69 of 114
186. That same day, Defendants Logue and Resch held a conference call with analysts to discuss the Company's 2008 first quarter results, during which Defendant Logue stated.
"Considering the market challenges, we're pleased with the strong year-over-year growth in our
core businesses . . . those same market conditions also presented opportunities for
overperformance in foreign exchange and in securities finance, as was true in the second half of
2007. Foreign exchange revenue in the first quarter was up 74% compared to the first quarter of
2007; and securities finance revenue was up more than 200%."
187. On May 9, 2008, State Street filed its Quarterly Report with the SEC on Form
10-Q for the 2008 fiscal first quarter ended March 31, 2008. The Company's Form 10-Q was
signed by Defendant Resch and reaffirmed the Company's financial results previously
announced on April 15, 2008.
188. The Company's first quarter 2008 Form 10-Q also made the following statement
regarding State Street's foreign exchange revenue, noting that the Company's Custody foreign
exchange trade volume increased 19%:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, increased 66% for the first quarter of 2008 compared to the first quarter of 2007. Foreign exchange trading revenue for the first quarter of 2008 totaled $265 million, up 74% from $152 million in the prior- year quarter. The increase reflected a 57% increase in currency volatility and a 28% increase in customer volumes, mostly in foreign exchange trading (a 29% increase), and included the contribution of $23 million of revenue from the acquired Investors Financial business. Volumes in custody foreign exchange trading increased 19% over last year.
189. The Company's first quarter 2008 Form 10-Q also made affirmative statements
concerning State Street's responsibilities to its custody clients: "In the normal course of
business, we hold assets under custody and management in a custodial or fiduciary capacity.
Management conducts regular reviews of its responsibilities in this regard and considers the
results in preparing the consolidated financial statements."
64 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 70 of 114
190. As discussed below, State Street completed a $2.8 billion registered public offering of the Company's common stock on June 3, 2008. The Offering Materials specifically incorporated several of State Street's filings with the SEC, including the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2007 and the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, which contained materially untrue statements and omissions.
191. On July 15, 2008, State Street issued a press release entitled, "State Street
Corporation Achieves Record Revenue of $2.7 Billion in the Second Quarter, Up 39% From A
Year Ago." The press release stated.
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fees, is $320 million for the quarter, up 23% from $260 million a year ago. The improvement was due primarily to increased volatility and higher volumes in foreign exchange.
192. On August 1, 2008, State Street filed its Quarterly Report with the SEC on Form
10-Q for the 2008 fiscal second quarter. The Company's Form 10-Q was signed by Defendant
Resch and reaffirmed the Company's financial results previously announced on July 15, 2008.
193. The Company's second quarter 2008 Form 10-Q also made the following statement regarding State Street's foreign exchange revenue, noting that the Company's
Custody foreign exchange trade volume increased 14% from the prior quarter:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, increased 23% for the second quarter of 2008 compared to the second quarter of 2007 and increased 43% in the six-month comparison. Foreign exchange trading revenue for the second quarter and first six months of 2008 totaled $227 million and $492 million, respectively, up 30% and 51% from the corresponding prior-year periods. The quarterly increase in foreign exchange trading revenue reflected a 77% increase in currency volatility and a 16% increase in customer volumes, mostly in foreign exchange sales trading (a 16% increase), and included the contribution of $25 million of foreign exchange revenue from the acquired Investors Financial business. Volumes in custody foreign exchange services increased 14% over last year. The six-month increase in foreign exchange trading revenue resulted from a 66% increase in currency
65 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 71 of 114
volatility along with a 21% increase in customer volumes, as well as the contribution of $48 million of foreign exchange revenue from the acquired Investors Financial business.
194. The Company's second quarter 2008 Form 10-Q also made affirmative
statements concerning State Street's responsibilities to its custody clients: "In the normal course
of business, we hold assets under custody and management in a custodial or fiduciary capacity.
Management conducts regular reviews of its responsibilities in this regard and considers the
results in preparing the consolidated financial statements."
195. By the end of the second quarter of 2008, State Street knew of the qta tam action
alleging a systemic fraud on State Street's most valued customers through the manipulation of
foreign exchange rates charged to these customers. Despite this knowledge, however,
Defendants, in the Form 10-Q, failed to acknowledge the existence of are risks involved with the action and investigation:
We are involved in various industry-related and other regulatory, governmental and law enforcement inquiries and subpoenas, as well as legal proceedings including the proceedings related to SSgA's active fixed-income strategies referenced above, that arise in the normal course of business. In the opinion of management, after discussion with counsel, these regulatory, governmental and law enforcement inquiries and subpoenas and legal proceedings can be defended or resolved without a material adverse effect on our consolidated financial condition or results of operations in future periods.
196. On October 15, 2008, State Street issued a press release entitled, "State Street
Corporation Reports Third-Quarter EPS of $1.09 Including Net Non-Operating Items of
$(0.15)." The press release stated, "Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fees, is $363 million for the quarter, up 13% from $320
million a year ago, itself an unusually strong quarter. The increase is driven by higher FX
volatility, especially at the end of the quarter, and higher revenue from brokerage and other
fees."
66 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 72 of 114
197. That same day, Defendants Logue and Resch held a conference call with analysts to discuss the Company's 2008 third quarter results, Defendant Resch discussed the reasons for the foreign exchange revenue growth:
Let me now highlight certain components of our income statement. Servicing and management fees both performed well, particularly in light of the significant declines in market valuations on both the S&P and the EEFA. The continuing volatility in the market benefited our trading revenue growth, particularly foreign exchange. Performance in securities finance was also strong on a year-over-year basis and was down about 30% from the second quarter due to the impact of the dividend season in Europe in the second quarter.
198. On November 5, 2008, State Street filed its Quarterly Report with the SEC on
Form 10-Q for the 2008 fiscal third quarter. The Company's Form 10-Q was signed by
Defendant Resch and reaffirmed the Company's financial results previously announced on
October 15, 2008. The Company's third quarter 2008 Form 10-Q made the following statement
regarding State Street's foreign exchange revenue:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, increased 13% for the third quarter of 2008 compared to the third quarter of 2007 and increased 31% in the nine-month comparison. Foreign exchange trading revenue for the third quarter and first nine months of 2008 totaled $258 million and $750 million, respectively, up 15% and 36% from the corresponding prior-year periods. The quarterly increase in foreign exchange trading revenue reflected a 51% increase in currency volatility, partially offset by a 3% decline in aggregate customer volumes. The nine-month increase in foreign exchange trading revenue resulted from a 60% increase in currency volatility along with a 12% increase in customer volumes, as well as the contribution of foreign exchange revenue from the acquired Investors Financial business compared to one quarter of revenue for the 2007 period.
199. The Company's third quarter 2008 Form 10-Q also made affirmative statements
concerning State Street's responsibilities to its custody clients: "In the normal course of
business, we hold assets under custody and management in a custodial or fiduciary capacity.
Management conducts regular reviews of its responsibilities in this regard and considers the
results in preparing the consolidated financial statements."
67 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 73 of 114
200. By the end of the third quarter of 2008, State Street knew of the qm tam action alleging a systemic fraud on State Street's most valued customers through the manipulation of foreign exchange rates charged to these customers. Despite this knowledge, however, the Form
10-Q for the Third Quarter 2008 contained the same disclosure as set forth above.
201. On January 20, 2009, State Street issued a press release entitled, "State Street
Reports 2008 Earnings Per Share of $3.89, up 13% on a Revenue Gain of 28% Compared to
2007," which revealed massive losses incurred by the Company, causing State Street's stock price to plummet almost 60%. In that same release, however, State Street continued to present fraudulently-obtained and inflated foreign exchange revenue:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fee revenue, is up 19%, from $352 million to $418 million. The increase is driven by higher volatility in foreign exchange, offset partially by a decline in foreign exchange volumes and in brokerage and other revenue.
202. On February 27, 2009, State Street filed its Annual Report with the SEC on Form
10-K for the 2008 fiscal year. The Company's Form 10-K was signed by Defendants Logue and
Resch and reaffirmed the Company's financial results previously announced on January 20,
2009. State Street's 2008 Form 10-K stated.
Trading services revenue includes revenue from foreign exchange trading and brokerage and other trading services. We offer a complete range of foreign exchange services under an account model that focuses on the global requirements of our customers for our proprietary research and to execute trades in any time zone. Foreign exchange trading revenue is influenced by three principal factors: the volume and type of customer foreign exchange transactions; currency volatility; and the management of currency market risks.
For 2008, foreign exchange trading revenue totaled $1.08 billion for 2008, a 35% increase from 2007 revenue of $802 million, and benefited from the continued disruption in the global securities markets. The increase was mainly driven by a 92% increase in currency volatility, but also included an increase of $45 million of foreign exchange revenue_attributable to the inclusion of a full year of revenue of the acquired Investors Financial business compared to two quarters for 2007. Aggregate customer volumes were relatively flat compared to 2007.
68 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 74 of 114
203. The Company's 2008 Form 10-K also made affirmative statements concerning
State Street's responsibilities to its custody clients: "In the normal course of business, we hold
assets under custody and management in a custodial or fiduciary capacity. Management
conducts regular reviews of its responsibilities in this regard and considers the results in
preparing the consolidated financial statements."
204. The statements set forth above were materially false and misleading for at least the following reasons:
a. State Street's wrongful overcharging of its custody clients had been ongoing since at least 2001, as described above in tf44 66;
b. the Company was overcharging its institutional clients by hundreds of millions of dollars for executing their foreign exchange trades, as described above in fi68-71; and
c. these activities had materially inflated the Company's reported financial results, causing material inflation of the Company's revenue and net income, as described above in tt68 -71.
2. Statements Involving Conduits and Investment Portfolio
205. On October 15, 2008, State Street issued a press release entitled, "State Street
Corporation Reports Third-Quarter EPS of $1.09 Including Net Non-Operating Items of
$(0.15)." That press release quoted Defendant Logue as stating, "Due to the unprecedented
market illiquidity in the third quarter, the unrealized after-tax mark-to-market losses at quarter
end on State Street's investment portfolio have increased to $3.3 billion and in the asset-backed
commercial paper Conduits to $2.1 billion. However, as we have said in the past, the asset
quality of both our investment portfolio and the conduit program remains high."
206. On October 15, 2008, State Street filed a Form 8-K with the SEC that attached a
presentation on State Street's Conduits, which Defendants Logue and Resch discussed that day
on an earnings conference call, as alleged below. The presentation claimed that the Conduits
69 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 75 of 114
had "strong overall asset quality," "no material concentration of risk among issuers or
servicers," and "no exposure to subprime mortgages."
207. On State Street's October 15, 2008 earnings call, in which Defendants Logue and
Resch participated, Defendant Resch stated.
As I have stated many times we created this program in 1992 primarily to address customer requests for high quality, highly rated commercial paper. The conduits have never suffered a credit loss on any asset they've purchase, evidence of our strong credit discipline. 80% at the assets are rated AAA, AA or A. . . . Due to the high quality of the assets and their performance, we do not currently believe we need to consolidate the conduits.
208. On November 5, 2008, State Street filed its Quarterly Report with the SEC on
Form 10-Q for the 2008 fiscal first quarter ended September 30, 2008. This Quarterly Report
disclosed the Conduits' assets by asset rating, type and origin only.
209. On November 10, 2008, State Street filed a Form 8-K with the SEC that attached
presentations on State Street's Conduits and investment portfolio, which Defendants Logue and
Resch would be discussing at a conference on November 11, 2008. The Conduit presentation
claimed that the Conduits had "strong overall asset quality," "no material concentration of risk
among issuers or servicers," and "no exposure to subprime mortgages." The presentation
offered materially false and misleading information about State Street's Conduits.
210. The statements set forth above were materially false and misleading because (a) the assets in the Conduit and investment programs were not high quality, but were suffering
from undisclosed losses; (b) the Conduits and investment portfolio were already suffering large
losses because of the steep decline in the value of the real-estate mortgage backed securities
held in the Conduits and investment portfolio.
70 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 76 of 114
3. Statements Regarding Internal Controls
211. On May 9, 2008, State Street filed its Quarterly Report with the SEC on Form
10-Q for the 2008 fiscal first quarter ended March 31, 2008. The Company's Form 10-Q
contained Sarbanes-Oxley required certifications, signed by Defendants Logue and Resch,
contained the same statements as those set forth in ¶J 157-58, above.
212. On August 1, 2008, State Street filed its Quarterly Report with the SEC on Form
10-Q for the 2008 fiscal second quarter. The Company's Form 10-Q contained Sarbanes-Oxley
required certifications, signed by Defendants Logue and Resch, contained the same statements
as those set forth in ¶J157-58, above.
213. On November 5, 2008, State Street filed its Quarterly Report with the SEC on
Form 10-Q for the 2008 fiscal third quarter. The Company's Form 10-Q contained Sarbanes-
Oxley required certifications, signed by Defendants Logue and Resch, contained the same
statements as those set forth in ilf157-58, above.
214. On February 27, 2009, State Street filed its Annual Report with the SEC on Form
10-K for the 2008 fiscal year. The Company's Form 10-K contained Sarbanes-Oxley required
certifications, signed by Defendants Logue and Resch, contained the same statements as those
set forth in ¶J157-58, above.
215. The statements set forth above were materially false and misleading for at least the following reasons:
a. State Street's wrongful overcharging of its custody clients had been ongoing since at least 2001, as described above in fi44-66;
b. the Company was overcharging its institutional clients by hundreds of millions of dollars for executing their foreign exchange trades, as described above in fi68-71; and
71 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 77 of 114
c. these activities had materially inflated the Company's reported financial results, causing material inflation of the Company's revenue and net income, as described above in ”68-71; and
d State Street lacked adequate internal controls over its financial reporting and foreign exchange operation, as described above in fi72-78.
D. False and Misleading Statements Relating To 2009
1. Statements Regarding Foreign Exchange Operations
216. On April 21, 2009, State Street issued a press release entitled, "State Street
Corporation Reports First-Quarter Earnings Per Share of $1.02 on Total Revenue of $2.0
Billion; Ongoing Expense Controls Drive Positive Operating Leverage; Progress Made On TCE
Improvement Plan." The press release stated:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fees, is $245 million for the first quarter of 2009, down 33% from $366 million in a very strong first quarter a year-ago. The 28% decrease in foreign exchange revenue is due to lower volumes, partially offset by higher volatility.
217. On May 4, 2009, State Street filed its Quarterly Report with the SEC on Form
10-Q for the 2009 fiscal first quarter. The Company's Form 10-Q was signed by Defendant
Resch and reaffirmed the Company's financial results previously announced on April 21, 2009.
The Company's Form 10-Q also made the following statement regarding State Street's foreign exchange revenue:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, decreased 33% for the first quarter of 2009 compared to the first quarter of 2008. Foreign exchange trading revenue for the first quarter of 2009 totaled $191 million, down 28% from $265 million in the prior-year quarter. The decrease was primarily the result of the impact of a 30% decline in aggregate customer volumes, both in custody foreign exchange services and foreign exchange trading and sales, partly offset by the impact of a 75% increase in currency volatility.
72 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 78 of 114
218. On July 21, 2009, State Street issued a press release entitled, "State Street
Corporation Reports Second-Quarter 2009 Earnings Per Share of $0.79 before Extraordinary
Loss Due to Conduit Consolidation, Which Includes Previously Disclosed Repayment of TARP
CPP of $0.23 Per Share." The press release stated, in relevant part:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fees, is $310 million for the second quarter of 2009, down 3% from $320 million the second quarter a year-ago. A 16% decrease in foreign exchange revenue is due to lower volumes, partially offset by higher volatility. Brokerage and other fees increased 29% due primarily to improved transition management business.
219. On August 10, 2009, State Street filed its Quarterly Report with the SEC on
Form 10-Q for the 2009 fiscal second quarter. The Company's Form 10-Q was signed by
Defendant Resch and reaffirmed the Company's financial results previously announced on July
21, 2009.
220. The Company's second quarter Form 10-Q also made the following statement regarding State Street's foreign exchange revenue:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, decreased slightly for the second quarter of 2009 compared to the second quarter of 2008 and decreased 19% in the six-month comparison. Foreign exchange trading revenue for the second quarter and first six months of 2009 totaled $190 million and $381 million, respectively, down 16% and 23% from $227 million and $492 million, respectively, for the corresponding prior-year periods. The quarterly decrease was primarily the result of the impact of a 20% decline in aggregate customer volumes, both in custody foreign exchange services and foreign exchange trading and sales, partly offset by the impact of a 47% increase in currency volatility. The six-month decrease was primarily the result of the impact of a 25% decline in aggregate customer volumes, both in custody foreign exchange services and foreign exchange trading and sales, partly offset by the effect of a 61% increase in currency volatility.
221. By the second quarter of 2009, State Street knew of both the qm tam action alleging a systemic fraud on State Street's most valued customers through the manipulation of
73 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 79 of 114
foreign exchange rates charged to these customers. Despite this knowledge, however, the Form
10-Q for the third quarter 2008 contained the same disclosure as set forth above.
222. The statements set forth above were materially false and misleading for at least the following reasons.
a. State Street's wrongful overcharging of its custody clients had been ongoing since at least 2001, as described above in fi44-66;
b. the Company was overcharging its institutional clients by hundreds of millions of dollars for executing their foreign exchange trades, as described above in fi68-71; and
c. these activities had materially inflated the Company's reported financial results, causing material inflation of the Company's revenue and net income, as described above in ”68-71.
2. Statements Regarding Internal Controls
223. On May 4, 2009, State Street filed its Quarterly Report with the SEC on Form
10-Q for the 2009 fiscal first quarter. The Company's Form 10-Q contained Sarbanes-Oxley
required certifications, signed by Defendants Logue and Resch, contained the same statements
as those set forth in ¶J157-58, above.
224. On August 10, 2009, State Street filed its Quarterly Report with the SEC on
Form 10-Q for the 2009 fiscal second quarter. The Company's Form 10-Q contained Sarbanes-
Oxley required certifications, signed by Defendants Logue and Resch, contained the same
statements as those set forth in ilf157-58, above.
225. The statements set forth above were materially false and misleading for at least the following reasons.
a. State Street's wrongful overcharging of its custody clients had been ongoing since at least 2001, as described above in tf44 66;
b. the Company was overcharging its institutional clients by hundreds of millions of dollars for executing their foreign exchange trades, as described above in fi68-71;
74 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 80 of 114
c. these activities had materially inflated the Company's reported financial results, causing material inflation of the Company's revenue and net income, as described above in tt68 -71; and
d State Street lacked adequate internal controls over its financial reporting and foreign exchange operation, as described above in fi72-78.
IX. LOSS CAUSATION
226. The Exchange Act Defendants' unlawful conduct alleged herein directly caused the losses incurred by Plaintiffs and the Class. Throughout the Class Period, the prices of State
Street common stock was artificially inflated as a direct result of the Exchange Act Defendants'
false and misleading statements and omissions detailed herein. The false and misleading
statements set forth above were widely disseminated to the securities markets, investment
analysts and the investing public.
227. As set forth herein, when the true facts became known and/or the materialization
of the risks that had been fraudulently concealed by the Exchange Act Defendants occurred, the
price of State Street common stock and other securities declined precipitously as the artificial
inflation was removed from the market price of these securities, causing substantial damage to
Plaintiffs and the members of the Class.
228. First, in response to State Street's January 2009 disclosures concerning its
Conduits and investment portfolio, the price of State Street common stock plummeted almost
60% in a single day — from a close of $36.35 per share on January 16, 2009 to $14.89 per share
on January 20, 2009 — wiping out over $9 billion in shareholder value. This stock drop was a
consequence of the revelation of the alleged fraud to the market. Indeed, securities analysts and
other market participants attributed this drop to the alleged fraud. For example, a MarketWatch
article dated January 20, 2009 and entitled "State Street shares lose more than half their value;
Investors fear company may need to raise capital after it updates risks" stated: "State Street
75 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 81 of 114
Corp.'s stock lost nearly 60% on Tuesday on concerns the company may have to bring troubled
investment vehicles onto its balance sheet, a move that could force it to raise capital and
potentially dilute shareholders." Similalrly, on January 22, 2009, Fitch announced that it had
downgraded State Street, which it explained was based on a decline in State Street's capital
levels based on market value depreciation in State Street's "investment portfolio" and in its "off
balance sheet asset-backed commercial paper conduits."
229. Second, as discussed above, on October 20, 2009, State Street's manipulation of
foreign exchange rates charged to its clients was revealed for the first time. In a press release
issued that day titled "Brown Sues State Street Bank for Massive Fraud Against CalPERS and
CalSTRS," the California Attorney General announced that the State of California had filed a
complaint against State Street relating to fraudulent practices in the Company's foreign
exchange trading services. The California AG stated that the suit was based on an
"unconscionable fraud" committed by State Street against the California pension funds. After the California AG disclosed his lawsuit on October 20, 2009, the price of State Street's common
stocked dropped by more than 12%, on heavy volume, from $52.25 per share on October 20,
2009 to close at $45.88 per share on October 21, 2009. The California AG suit was widely
reported, and analysts and the market understood its impact. For example, an October 21, 2009
analyst report, SunTrust Robinson Humphrey lowered its price target and earnings-per-share
estimates in response to the revelation of alleged fraud concerning State Street's foreign
exchange trading.
X. PRESUMPTION OF RELIANCE
230. At all relevant times, the market for State Street's securities was an efficient
market for the following reasons, among others:
76 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 82 of 114
a. The Company's securities were actively traded on the New York Stock
Exchange, a highly efficient market;
b State Street common stock traded at a significant daily trading volume;
c. As a regulated issuer, the Company filed periodic public reports with the SEC;
d State Street was followed by numerous securities analysts, who issued a
significant number of reports on State Street during the Class Period;
e. State Street was eligible to register securities using Form S-3; and
f. State Street communicated with public investors via established market
communication mechanisms, including the regular issuance of press releases
through the Business Wire news service, and conference calls with analysts and
investors.
231. As a result, the market for State Street's securities promptly digested current
information with respect to State Street from all publicly available sources and reflected such
information in the price of the Company's securities. Under these circumstances, purchasers of the Company's publicly traded securities during the Class Period suffered similar injury through their purchase of the publicly traded securities of State Street at artificially inflated prices, and a
presumption of reliance applies.
XI. INAPPLICABILITY OF STATUTORY SAFE HARBOR AND BESPEAKS CAUTION DOCTRINE
232. The statutory safe harbor and/or bespeaks caution doctrine applicable to forward-
looking statements under certain circumstances does not apply to any of the false and
misleading statements pleaded in this Complaint.
233. First, none of the statements complained of herein was a forward-looking
statement. Rather they were historical statements or statements of purportedly current facts and
77 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 83 of 114
conditions at the time the statements were made, including statements of reported financial
results and underwriting, surveillance and accounting practices. Given the then-existing facts
contradicting the Defendants' statements, the generalized risk disclosures made by State Street,
including those regarding the Company's underwriting, surveillance, mark-to-market
accounting, loss reserves, and/or financial condition, were not sufficient to insulate the
Defendants from liability for the statements they made because those statements were materially
misstated when made.
234. Second, the statutory safe harbor does not apply to statements included in
financial statements which purport to have been prepared in accordance with GAAP.
235. To the extent any of the false or misleading statements alleged herein can be
construed as forward-looking, the statements were not accompanied by meaningful cautionary
language identifying important facts that could cause actual results to differ materially from those in the statements. As set forth above in detail, then-existing facts contradicted the
Defendants' alleged false and/or materially misleading statements.
236. To the extent that the statutory safe harbor may apply to any of these false
statements alleged herein, Defendants are liable for those false forward-looking statements
because at the time each of those statements were made the speaker actually knew the statement
was false or the statement was authorized and/or approved by an executive officer of State
Street who actually knew that those statements were false when made.
237. In addition, to the extent any of the statements set forth above were accurate
when made, they became inaccurate or misleading because of subsequent events, and the
Officer Defendants failed to update those statements that later became inaccurate.
78 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 84 of 114
XII. CLASS ACTION ALLEGATIONS
238. Plaintiffs bring this action on behalf of themselves and as a class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on behalf of all persons or entities (the
"Class") that acquired the securities of State Street during the period from October 17, 2006 through October 19, 2009, inclusive, including securities purchased in the June 2008 Offering,
and who suffered damages as a result. Excluded from the Class are: (a) Defendants; (b)
members of the immediate families of the Defendants who are natural persons; (c) the
subsidiaries and affiliates of Defendants; (d) any person or entity who is a partner, executive
officer, director, or controlling person of State Street or of any other Defendant; (e) any entity in
which any Defendant has a controlling interest; (f) Defendants' liability insurance carriers; and
(g) the legal representatives, heirs, successors and assigns of any such excluded party.
239. The members of the Class are so numerous that joinder of all members is
impracticable. As of January 31, 2009, State Street had 431,965,675 shares of common stock
outstanding. Throughout the Class Period, State Street's common stock was actively traded on the New York Stock Exchange. While the exact number of Class members is unknown to Lead
Plaintiffs at this time, Lead Plaintiffs believe that Class members number at least in the thousands.
240. Plaintiffs' claims are typical of the claims of the members of the Class. Plaintiffs
and other members of the Class acquired State Street common stock in the open market during the Class Period. Plaintiffs and members of the Class acquired State Street common stock
pursuant or traceable to the June 2008 Offering's registration statement, and sustained damages
as a result of Defendants' conduct.
79 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 85 of 114
241. Plaintiffs will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
Plaintiffs have no interests that are adverse or antagonistic to the Class.
242. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Because the damages suffered by individual members of the
Class may be relatively small, the expense and burden of individual litigation make it impracticable for Class members individually to seek redress for the wrongful conduct alleged herein.
243. Common questions of law and fact exist as to all members of the Class, and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are:
(a) whether the Federal securities laws were violated by Defendants' conduct as alleged herein;
(b) whether the SEC filings, press releases and other public statements disseminated to the investing public during the Class Period contained material misstatements or omitted to state material information;
(c) whether the registration statement and prospectuses for the Company's June 2008 Offering contained material misstatements or omitted to state material information;
(d) whether and to what extent the Company's financial statements failed to comply with GAAP during the Class Period;
(e) whether and to what extent the market prices of Sate Street's common stock was artificially inflated during the Class Period due to the omissions and/or misstatements complained of herein;
whether, with respect to Plaintiffs' claims under the Exchange Act, Defendants named in those claims acted with scienter;
(g) whether, with respect to Plaintiffs' claims under the Exchange Act, reliance may be presumed pursuant to the fraud-on-the-market doctrine;
80 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 86 of 114
(h) whether, with respect to Plaintiffs' claims under the Securities Act, Defendants named in those claims can sustain their burden of establishing an affirmative defense pursuant to the applicable statute; and
(i) whether, the members of the Class have sustained damages as a result of the conduct complained of herein, and if so, the proper measure of damages.
244. The names and addresses of those persons and entities who purchased or sold
State Street securities during the Class Period are available from the Company's transfer agent(s) and/or from the Underwriter Defendants. Notice may be provided to Class members via first-class mail using techniques and a form of notice similar to those customarily used in securities class actions.
XIII CLAIMS FOR RELIEF UNDER THE EXCHANGE ACT COUNT I For Violation of Section 10(b) of the Exchange Act and Rule 10b-5(b) Against Defendants State Street, Logue and Resch
245. Plaintiffs repeat and reallege all paragraphs set forth above as if fully set forth herein.
246. During the Class Period, the Exchange Act Defendants named in this Count: (a) deceived the investing public, including Plaintiffs and other Class members, as alleged herein;
(b) artificially inflated and maintained the market price of State Street's securities; and (c) caused Plaintiffs and other members of the Class to purchase State Street's securities at artificially inflated prices.
247. As a result of their making and/or their substantial participation in the creation of affirmative statements and reports to the investing public, the Exchange Act Defendants had a duty to promptly disseminate truthful information that would be material to investors in compliance with the integrated disclosure provisions of the SEC, as embodied in SEC
81 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 87 of 114
Regulation S-K (17 C.F.R. § 229.10, et seq.) and other SEC regulations, including accurate and truthful information with respect to the Company's operations and performance, so that the
market prices of State Street's publicly traded securities would be based on truthful, complete
and accurate information.
248. The Exchange Act Defendants made untrue statements of material fact and/or
omitted to state material facts necessary to make the statements made not misleading, and/or
substantially participated in the creation of the alleged misrepresentations, which operated as a
fraud and deceit upon the purchasers of State Street's securities, in an effort to maintain
artificially high market prices for the securities of State Street, in violation of Section 10(b) of the Exchange Act and Rule 10b-5(b).
249. The Exchange Act Defendants directly and indirectly, by the use of means and
instrumentalities of interstate commerce and/or the mails, made, or substantially participated in the creation of, untrue statements of material facts and/or omitted to state material facts
necessary in order to make the statements made about the Company in light of the
circumstances under which they were made, not misleading, as set forth herein.
250. The Exchange Act Defendants named in this Count had actual knowledge of the
misrepresentations and omissions of material facts set forth herein, or acted with reckless
disregard for the truth, in that they failed to ascertain and to disclose such facts, even though
such facts were available to them. The facts alleged herein set forth a strong inference that each
of the Exchange Act Defendants named in this Count acted with scienter.
251. As a result of the dissemination of the materially false and misleading
information and failure to disclose material facts, as set forth above, the market prices of State
Street's common stock was artificially inflated throughout the Class Period. In ignorance of the
82 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 88 of 114
fact that the market prices of State Street's common stock was artificially inflated, and relying
directly or indirectly on the false and misleading statements made by the Exchange Act
Defendants, or upon the integrity of the market in which such shares trade, and the truth of any
representations made to appropriate agencies and to the investing public, at the times at which
such statements were made, and/or on the absence of material adverse information that was
known or, with recklessness, disregarded by the Exchange Act Defendants but not disclosed in
public statements by these Defendants, Plaintiffs and the other members of the Class purchased
State Street's securities at artificially high prices, and were damaged when truthful information
was disclosed and the inflation of State Street's securities' values was corrected.
252. At the time of said misrepresentations and omissions, Plaintiffs and the other
members of the Class were unaware of their falsity, and believed the false statements to be true.
Had Plaintiffs, the other members of the Class and the marketplace known of the true nature of the operations of State Street and the noncompliance with federal law, which were not disclosed
by the Exchange Act Defendants, Plaintiffs and the other members of the Class would not have
purchased such securities or, if they had purchased such securities, they would not have done so
at the artificially inflated prices which they paid.
253. The Exchange Act Defendants acted with scienter in that they knew or recklessly
disregarded that the public documents and statements issued or disseminated in the name of
State Street were materially false and misleading, knew or recklessly disregarded that such
statements or documents would be issued or disseminated to the investing public and knowingly
or recklessly and substantially participated or acquiesced in the issuance or dissemination of
such statements or documents in violation of the federal securities laws.
83 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 89 of 114
254. As alleged herein, the Exchange Act Defendants participated in the fraudulent
scheme, by virtue of their receipt of information reflecting the true facts regarding State Street, their control over, and/or receipt and/or modification of State Street's allegedly materially
misleading misstatements and/or their associations with State Street which made them privy to
confidential proprietary information concerning State Street, participated in the fraudulent
scheme alleged herein.
255. The Exchange Act Defendants knew and/or recklessly disregarded the falsity and
misleading nature of the information which they caused to be disseminated to the investing
public. The ongoing fraudulent conduct alleged herein could not have been perpetrated over a
substantial period of time, as has occurred, without the knowledge or recklessness and
complicity of the personnel at the highest level of the Company.
256. The Exchange Act Defendants had the opportunity to perpetrate the fraudulent
scheme and course of business described herein because they were the most senior officers and
directors of State Street, and they issued statements and press releases on behalf of State Street
and had the opportunity to commit the fraud alleged herein. As illustrated by the Exchange Act
Defendants' respective positions with the Company, they had and used their influence and
control to further the scheme alleged herein. The Exchange Act Defendants had broad
responsibilities that included communicating with the financial markets and providing the
markets with financial results.
257. By reason of the foregoing, the Exchange Act Defendants have violated Section
10(b) of the Exchange Act and Rule 10b-5(b), promulgated thereunder, and are liable to
Plaintiffs and the other members of the Class for damages which they suffered in connection
with their purchases of State Street securities during the Class Period.
84 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 90 of 114
COUNT II For Violation of Section 20(a) of the 1934 Act Against Logue and Resch
258. Plaintiffs repeat and reallege all paragraphs set forth above as it fully set forth
herein.
259. State Street committed a primary violation of Section 10(b) of the Exchange Act,
15 U.S.C. §78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, by making the false and misleading statements of material facts, identified above, in connection with the
purchase or sale of securities, which constituted a fraud on the market and were, therefore,
presumed to have been relied upon by Lead Plaintiffs and the Class. At the time that it made these false and misleading statements, the Company either knew of, or recklessly disregarded, their falsity.
260. During their employment by State Street, as State Street's two most senior
officers, Defendants Logue and Resch exercised control over the general operations of State
Street. Moreover, these defendants had direct control and/or supervisory involvement in State
Street's operations during the Class Period, and therefore had the power to control or influence the particular transactions giving rise to the violations of the Exchange Act by the Company as
alleged herein, and exercised the same.
261. By reason of their status as officers of State Street during the Class Period,
Defendants Logue and Resch are "controlling persons" of State Street within the meaning of
Section 20(a) of the Exchange Act because they had the power and influence to cause the
Company to engage in the unlawful conduct complained of herein. Because of their positions
of control, these Defendants were able to, and did, directly and indirectly, control the conduct of
85 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 91 of 114
State Street's business, the information contained in its filings with the SEC, and public
statements about its business.
262. As senior executive officers and/or directors of State Street, Defendants named
in this count had a duty to disseminate accurate and truthful information regarding State Street's
financial statements and to correct any previously issued statements that had become untrue so that the market price of State Street's securities would be based upon truthful and accurate
information.
263. Each of the Defendants named in this Count participated in writing or reviewing the Company's corporate reports, press releases, and SEC filings alleged by Plaintiffs to be
misleading prior to and/or shortly after these statements were issued and thus had the ability and
opportunity to prevent their issuance or cause them to be corrected and thereby culpably
participated in the fraud alleged herein.
264. Moreover, each of Defendants named in this Count served as the Company's
primary spokespeople and representatives in communicating with the investing public about the
matters complained of herein, and did in fact speak and write on the Company's behalf
concerning the factual bases of Plaintiffs' fraud allegations.
265. As set forth above, each of the Defendants named in this Count controlled State
Street, which violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by its acts and omissions as alleged in this complaint. By virtue of their positions as
controlling persons, these Defendants are liable pursuant to Section 20(a) of the Exchange Act.
As a direct and proximate cause of the wrongful conduct set forth in this Count, Lead Plaintiffs
and other members of the Class suffered damages in connection with their purchases of the
Company's securities during the Class Period.
86 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 92 of 114
THE SECURITIES ACT CLAIMS
XIV. CLAIMS BROUGHT PURSUANT TO THE SECURITIES ACT
266. In the allegations and claims set forth in this part of the Complaint, Plaintiffs
assert a series of strict liability and negligence claims based on Sections 11, 12, and 15 of the
Securities Act of 1933 (the "Securities Act"), on behalf of the Class (as defined in above).
Plaintiffs explicitly disclaim any allegations of fraud, scienter or recklessness for their Securities
Act Claims because these claims are not based on any allegations of knowing or reckless
misconduct on behalf of the Defendants named in the First and Second Counts above, nor do they allege, or sound, in fraud.
267. These Securities Act claims concern a $2.8 billion registered public offering of
35,715,000 shares of State Street common stock (the "June 2008 Offering" or "Offering"). As
more fully described below, the Offering was conducted pursuant to a shelf registration
statement which was filed with the SEC on Form S-3 on March 21, 2006 (the "Shelf Registration
Statement").
A. The Securities Act Plaintiffs
268. The Public Employees' Retirement System of Mississippi ("MPERS") is the
retirement system for nearly all non-federal public employees in the State of Mississippi and
provides benefits to over 75,000 retirees, and future benefits to more than 250,000 current and
former public employees. MPERS currently manages billions of dollars in assets on behalf of
its members. During the Class Period, MPERS purchased stock in State Street pursuant and/or traceable to the June 2008 Offering and suffered substantial damages as a result of the violations
of the securities laws alleged herein. On May 24, 2010, the Court appointed MPERS to serve as
Co-Lead Plaintiffs in this consolidated securities class action.
87 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 93 of 114
269. Union Asset Management Holding AG ("Union") is the holding organization of the Union Investment Group and has offices in Germany, Luxembourg, Poland, and Italy.
Union, which as more than 2,500 employees and more than 50 years of investment experience,
manages more than $225 billion in assets and ranks among the three leading German fund
managers by market share. During the Class Period, Union purchased stock in State Street and
suffered substantial damages as a result of the violations of the securities laws alleged herein.
On May 24, 2010, the Court appointed Union to serve as Co-Lead Plaintiffs in this consolidated
securities class action.
B. The Securities Act Defendants
1. The Company
270. Defendant State Street is a Massachusetts corporation with its principal executive
offices located at One Lincoln Street, Boston, Massachusetts, 02111 State Street was the issuer
of the common stock that was sold pursuant to the Offering.
2. The Officer Defendants
271. Defendant Ronald E. Logue ("Logue") was at all relevant times, Chairman of the
Board of Directors and Chief Executive Officer ("CEO") of State Street from June 2004 through
March 2010, and served as President and Chief Operating Officer ("COO") of State Street from 2000
until June 2004. Defendant Logue signed the Shelf Registration Statement.
272. Defendant Edward J. Resch ("Resch") was the Executive Vice President and Chief
Financial Officer ("CFO") of State Street from 2002 through the present. Defendant Resch signed
the Shelf Registration Statement.
273. Defendant Pamela D. Gormley ("Gormley") was, at all relevant times, Executive
Vice President and Corporate Controller until December 21, 2006, and thereafter, Executive Vice
88 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 94 of 114
President and the head of corporate systems and operations. Defendant Gormley signed the Shelf
Registration Statement.
3. The Director Defendants
274. Defendant Kennett F. Burnes ("Burnes") was, at times relevant hereto, a member of the Board of Directors and signed the Shelf Registration Statement.
275. Defendant Peter Coym ("Coym") was, at times relevant hereto, a member of the
Board of Directors.
276. Defendant Nader F Darehshori ("Darehshori") was, at times relevant hereto, a member of the Board of Directors and signed the Shelf Registration Statement.
277. Defendant Amelia C. Fawcett ("Fawcett") was, at times relevant hereto, a member of the Board of Directors and signed the Shelf Registration Statement.
278. Defendant David P. Gruber ("Gruber") was, at times relevant hereto, a member of the
Board of Directors and signed the Shelf Registration Statement.
279. Defendant Linda A. Hill ("Hill") was, at times relevant hereto, a member of the
Board of Directors and signed the Shelf Registration Statement.
280. Defendant Charles R. LaMantia ("LaMantia") was, at times relevant hereto, a member of the Board of Directors and signed the Shelf Registration Statement.
281. Defendant Maureen J. Miskovic ("Miskovic") was, at times relevant hereto, a member of the Board of Directors.
282. Defendant Richard P. Sergel ("Sergel") was, at times relevant hereto, a member of the Board of Directors and signed the Shelf Registration Statement.
283. Defendant Ronald L. Skates ("Skates") was, at times relevant hereto, a member of the
Board of Directors and signed the Shelf Registration Statement.
89 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 95 of 114
284. Defendant Gregory L. Summe ("Summe") was, at times relevant hereto, a member of the Board of Directors and signed the Shelf Registration Statement.
285. Defendant Robert E. Weissman ("Weissman") was, at times relevant hereto, a member of the Board of Directors and signed the Shelf Registration Statement.
286. Defendants Burnes, Darehshori, Fawcett, Gruber, Hill, LaMantia, Sergel, Skates,
Summe and Weissman are referred to herein as the "Director Defendants."
4. Underwriter Defendants 5
287. On June 3, 2008, the Underwriter Defendants purchased, sold and distributed
35,715,000 shares of State Street common stock. Under the underwriting agreement, the
Underwriter Defendants had an option — which was exercised — to buy up to an additional 5,357,250 shares from State Street in the same proportionate allotment as on June 3, 2008.
288. Goldman, Sachs & Co. ("Goldman") is an investment banking firm that provides securities underwriting, financial advisory and other services. Goldman acted as one of the underwriters on the June 2008 Offering, and was responsible for ensuring the truthfulness and accuracy of the various statements contained in or incorporated by reference into the Offering
Materials (defined below). Goldman purchased, sold and distributed 55% of the shares (19,643,250 shares on June 3, 2008, and an additional 2,946,487 shares on June 6, 2008), for a total of approximately $1.58 billion.
289. Morgan Stanley & Co. Incorporated ("Morgan Stanley") is an investment banking firm that provides securities underwriting, financial advisory, and other services. Morgan Stanley
5 Lehman Brothers Inc. ("Lehman") acted as one of the underwriters on the June 2008 Stock Offering, purchasing, selling and distributing 5% of the shares (1,785,750 shares on June 3, 2008, and an additional 267,862 shares on June 6, 2008), for a total of approximately $144 million. Lehman is not named as a defendant herein only because it has filed a petition for Chapter 11 bankruptcy, which invokes the "Automatic Stay" provisions of the bankruptcy code. 11 U. S . C. § 362.
90 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 96 of 114
acted as one of the underwriters on the June 2008 Offering, and was responsible for ensuring the truthfulness and accuracy of the various statements contained in or incorporated by reference into the
Offering Materials. Morgan Stanley purchased, sold and distributed 30% of the shares (10,714,500 shares on June 3, 2008, and an additional 1,607,175 shares on June 6, 2008) for a total of approximately $862.5 million.
290. Credit Suisse Securities (USA) LLC ("Credit Suisse") is an investment banking firm that provides securities underwriting, financial advisory, and other services. Credit Suisse acted as one of the underwriters on the June 2008 Offering, and was responsible for ensuring the truthfulness and accuracy of the various statements contained in or incorporated by reference into the Offering
Materials. Credit Suisse purchased, sold and distributed 5% of the shares (1,785,750 shares on June
3, 2008, and an additional 267,862 shares on June 6, 2008), for a total of approximately $144 million.
291. UBS Securities LLC ("UBS") was an underwriter of the Offering as specified herein.
As an underwriter of the Offering, UBS acted as one of the underwriters on the June 2008 Stock
Offering, and was responsible for ensuring the truthfulness and accuracy of the various statements contained in or incorporated by reference into the Offering Materials. UBS purchased, sold and distributed 5% of the shares (1,785,750 shares on June 3, 2008, and an additional 267,862 shares on
June 6, 2008), for a total of approximately $144 million.
292. Defendants Goldman, Morgan Stanley, Credit Suisse, and UBS are referred to herein as the "Underwriter Defendants."
5. Auditor Defendant
293. Defendant Ernst & Young LLP ("Ernst & Young"), at all relevant times, served as an Independent Registered Public Accounting Firm for State Street. Ernst & Young audited
State Street's financial statements for the year ended December 31, 2007, which financial statements were approved by Ernst & Young and included in State Street's Annual Reports for
91 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 97 of 114
the years ended December 31, 2006 and December 31, 2007, which were filed on Form 10-K
with the SEC and incorporated by reference into the Offering. Ernst & Young consented to the
incorporation by reference of its report of State Street's annual report on Form 10-K and to the
incorporation by reference of its report in the Shelf Registration Statement at issue herein. Ernst
& Young is referred to herein as the "Auditor Defendant."
C. Background Of The Securities Act Claims
294. On or about June 3, 2008, the Company completed the June 2008 Offering, a $2.8
billion registered public offering of 35,715,000 shares of State Street common stock. The
Offering was conducted pursuant to the Shelf Registration Statement, which was filed with the
SEC on Form S-3 on March 21, 2006. Form S-3 is a so-called "shelf registration," which permits
an issuer to register numerous different securities for later issuance in a single SEC filing. Once this
"shelf' is established, the issuer may later "take down" securities from the shelf by issuing them to
the public pursuant to a later-filed Prospectus, Prospectus Supplement, and/or Pricing Supplement
that refers investors to the underlying Form S-3.
295. Specifically, a prospectus dated June 2, 2008 was issued pursuant to the March 21,
2006 Shelf Registration Statement, as was a prospectus supplement, dated June 3, 2008, both of
which became part of the Shelf Registration Statement pursuant to which the Offering was
conducted. The Shelf Registration Statement and the relevant prospectus and prospectus supplement
are referred to collectively as the "Offering Materials."
296. The Offering Materials incorporate by reference numerous other public filings of the
issuer, specifically, State Street's Annual Report on Form 10-K for the fiscal year ended December
31, 2007, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and
State Street's Current Reports on Form 8-K filed on January 3, 2008, January 17, 2008, January 25,
2008, April 7, 2008, May 5, 2008 and June 2, 2008.
92 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 98 of 114
297. In State Street's Form 10-K for the year ended December 31, 2007, State Street's independent registered public accounting firm, Defendant Ernst & Young, expressed an unqualified opinion of its audit of the Company's "consolidated statement of condition of State Street
Corporation as of December 31, 2007" and stated that "State Street Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007." Ernst
& Young consented to the incorporation by reference of its audit opinion concerning State Street's consolidated financial statements and the effectiveness of the Company's internal control over financial reporting in the Shelf Registration Statement. Furthermore, State Street stated in the
Offering Materials that the financial statements set forth in the Form 10-K for the year ended
December 31, 2007 and the effectiveness of the Company's internal control over financial reporting were "incorporated herein by reference in reliance upon such reports given on the authority of such firm [Ernst & Young] as experts in accounting and auditing."
298. Goldman, Morgan Stanley, Credit Suisse, Lehman and UBS, acting as the underwriters of the Offering, and who therefore sold and distributed the 35,715,000 shares in the
Offering to the investing public, were obligated to ensure the truthfulness and accuracy of the various statements contained in or incorporated by reference into the Offering Materials.
299. As described below, the Offering Materials contained untrue statements of material fact and material omissions, regarding, among other things, State Street's financial statements, which reported artificially inflated revenues by overcharging its clients for foreign exchange services, and its exposure to billions of dollars in losses on investments in off-balance sheet Conduits and investment portfolio.
1. State Street's Foreign Exchange Practices
300. Throughout the Class Period, State Street generated hundreds of millions of dollars in revenue from foreign exchange trading by improperly overcharging its clients in
93
Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 99 of 114
violation of State Street's contractual arrangements (and contrary to State Street's public
statements regarding its supposed "highest standards of ethics [and] service quality"). State
Street would add substantial mark-ups to the exchange rate that it used when making foreign
exchange trades for its clients. These mark-ups were not permitted by State Street's contractual
arrangements with its clients and was done without the clients' knowledge. In October 2009, State
Street's foreign exchange practices were revealed when the Attorney General for the State of
California ("California AG") filed a lawsuit against the Company, causing the Company's stock to
drop approximately 12%. One day later the Company's CEO, Logue, unexpectedly resigned.
301. State Street's practice of overcharging its clients for foreign exchange trading
services artificially inflated the Company's reported foreign exchange revenue prior to the June
2008 Offering by at least $349 million, or 30 percent, as shown in the chart below:
Inflated PeHod Reported FX Revenue Actual FX Revenue Without Fraud (30%) 2006 (4Q) $141,000,000 $99,000,000
2007 $802,000,000 $561,000,000
2008(1Q) $265,000,000 $199,000,000
Total $1,208,000,000 $859,000,000
Difference $349,000,000
302. In addition, the inflation of foreign exchange revenue overstated the Company's
reported net income by approximately 11.7 percent during the financial periods preceding the June
2008 Offering. Specifically, net income was overstated by 8.4% for the fourth quarter of 2006,
12.7% for the year ended 2007, and 10.5% for the first quarter of 2008.
94 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 100 of 114
303. As a result of these overstatements of foreign exchange trading revenue, the
Company's publicly filed financial results that were incorporated into the Offering Materials contained untrue and misleading statements of fact.
2. State Street's Conduit and Investment Programs
304. State Street also misrepresented the Company's exposure related to its multi- billion dollar "Conduit" program in the Offering Materials and the documents specifically incorporated therein. These Conduits — off-balance sheet special purpose vehicles which raised money by issuing huge amounts of commercial paper that — were marketed and sold to institutional clients. The Conduits then used those proceed to buy longer-term assets, including large amounts of real estate mortgage-backed securities ("RMBS").
305. On January 20, 2009, State Street disclosed that it was buying billions of dollars of commercial paper in order to keep the Conduits liquid and that the Company's unrealized losses in these Conduits and in its own investment portfolio totaled nearly $10 billion. All three major rating agencies immediately downgraded the Company, and shares of State Street dropped over
60%. In reality, the Company's had underreported its losses in its Conduit and investment program during each of the financial periods addressed by the Offering Materials (more specifically, the year 2007 and the first quarter of 2008). The specific untrue and misleading statements are discussed below.
306. By the time that State Street completed the June 2008 Offering, the collapse of the real estate markets had turned into a global financial meltdown. Indeed, by the time the June
2008 Offering numerous financial institutions had taken significant write-downs on RMBS collateralized by Alt-A and subprime mortgages, a number of SIVs similar to State Street's conduits had collapsed and investment banking giant Bear Stearns had been forced into a fire sale due to its exposure to subprime assets.
95 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 101 of 114
3. State Street's Internal Controls
307. State Street also misrepresented its risk management policies and internal controls
in the Offering Materials (including the documents specifically incorporated by reference therein). State Street's internal and risk control systems failed to detect the practice of
overcharging clients for their foreign exchange trades For example, State Street input foreign
exchange transactions and trade prices manually into the system, a practice which allowed
foreign exchange rates charged to custody clients to be manipulated and the clients overcharged
or under-credited, depending on the whether the transaction was a purchase or sale.
D. The Offering Materials Contained Untrue Statements Of Fact And Omitted Material Facts Necessary To Make The Offering Materials Not Misleadinp
1. The Offering Materials Failed To Disclose That State Street Was Overstating Its Foreign Exchange Revenue By Hundreds Of Millions Of Dollars
308. On January 17, 2008, State Street filed a Form 8-K, which attached State Street's
press release issued on January 15, 2008. In that press release, entitled, "State Street Reports
Fourth-Quarter Earnings Per Share of $.57, Including a Net after-Tax Charge of $279 Million, or
$.71 Per Share," the Company stated, in relevant part:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fee revenue, is up 73%, from $203 million to $352 million. The increase is driven by improved volumes and higher volatility in foreign exchange, as well as an increase in brokerage and other revenue principally due to the acquisition of Currenex in March, 2007.
309. The 2007 Form 10-K made the following statements regarding State Street's
foreign exchange revenue:
Foreign exchange trading revenue is influenced by three principal factors: the volume and type of customer foreign exchange transactions; currency volatility; and the management of currency market risks.
96 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 102 of 114
For 2007, foreign exchange trading revenue increased 31%, to $802 million from $611 million in 2006, and benefited from the disruption in the global securities markets that occurred in the second half of the year. The increase was mainly driven by a 39% increase in customer volumes, but also was the result of the inclusion of $43 million of foreign exchange revenue from the acquired Investors Financial business.
310. The 2007 Form 10-K also made affirmative statements concerning State Street's responsibilities to its custody clients:
In the normal course of business, we hold assets under custody and management in a custodial or fiduciary capacity. Management conducts regular reviews of its responsibilities in this regard and considers the results in preparing the consolidated financial statements. In this regard, in the opinion of management, no contingent liabilities existed at December 31, 2007, that would have had a material adverse effect on State Street's consolidated financial position or results of operations.
311. The Company's first quarter 2008 Form 10-Q also made the following statement regarding State Street's foreign exchange revenue, noting that the Company's Custody foreign exchange trade volume increased 19%:
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, increased 66% for the first quarter of 2008 compared to the first quarter of 2007. Foreign exchange trading revenue for the first quarter of 2008 totaled $265 million, up 74% from $152 million in the prior- year quarter. The increase reflected a 57% increase in currency volatility and a 28% increase in customer volumes, mostly in foreign exchange trading (a 29% increase), and included the contribution of $23 million of revenue from the acquired Investors Financial business. Volumes in custody foreign exchange trading increased 19% over last year.
312. The Form 10-Q also made affirmative statements concerning State Street's responsibilities to its custody clients, which were identical to the statements set forth in 1f310, above.
313. State Street's wrongful overcharging of its custody clients had been ongoing since at least 2001, and continued throughout the Class Period. Defendants' public statements
97 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 103 of 114
regarding the Company's foreign exchange revenues were materially untrue and misleading
when made because:
a. State Street was artificially inflating its foreign exchange trading revenue by overcharging its clients in violation of contractual arrangements with its clients.
b. these activities had materially inflated the Company's reported financial results; and
c. State Street was misrepresenting the reasons for its increases in foreign exchange trading revenue by failing to disclose that it was overcharging its clients.
2. The Offering Materials Contained Untrue And Misleadinp Statements About State Street's Conduit Program And Investment Portfolio
314. On January 17, 2008, State Street filed with the SEC a Form 8-K attaching a
presentation on State Street's Conduits, which Defendants Logue and Resch discussed on an
earnings conference call on January 15, 2008. The presentation claimed that the Conduits had
"strong overall asset quality," "no material concentration of risk among issuers or servicers," and
"no exposure to subprime mortgages."
315. On February 15, 2008, State Street filed its Annual Report with the SEC on Form
10-K for the 2007 fiscal year. This Annual Report disclosed the Conduits' assets by asset rating, type and origin only, and failed to disclose the true, risky nature of the assets and the full extent
of the losses they had suffered. Furthermore, this Annual Report stated that "none of the
conduits' portfolio securities were predominantly collateralized by sub-prime real estate
mortgages." The 2007 Form 10-K also contained false financial information, in that it reported that State Street's net income for the year was $1.216 billion.
316. On May 9, 2008, State Street filed its Quarterly Report with the SEC on Form 10-
Q for the 2008 fiscal first quarter ended March 31, 2008. This Quarterly Report, like State
98 Case 1 :09-cv-12146-NG Document 45 Filed 06/25/10 Page 104 of 114
Street's earlier SEC filings, disclosed the Conduits' assets by asset rating, type and origin only,
and failed to disclose the true, risky nature of the assets and the full extent of the losses they had
suffered. Furthermore, this Quarterly Report stated that, "none of the conduits' portfolio
securities were predominantly collateralized by sub-prime real estate mortgages." The Form 10-
Q also contained false financial information, in that it reported that State Street's net income for the quarter was $530 million.
317. On June 2, 2008, State Street filed with the SEC a Form 8-K. That Form 8-K,
among other things, included presentations on State Street's Conduits and investment portfolio.
The presentation on the Conduits claimed that the Conduits assets were of "high credit quality,"
based on their ratings and a comparison to the Conduits' peers. Furthermore, the presentation
claimed that the Conduits had "no direct investments in subprime mortgages . . .."
318. These statements were materially untrue and misleading in that (a) the Conduit
and investment programs were not "high quality" but were suffering from undisclosed losses; (b) the Conduits should have been consolidated with State Street's financial statements, as (i) the
Conduits were already suffering large losses because of the deteriorating assets therein, (ii) the
Conduits were being guaranteed, implicitly and explicitly, by State Street, and (iii) State Street
was at risk for the majority of the Conduits' losses; (c) had State Street consolidated the
Conduits, as GAAP required, it would have taken a loss in at least the millions of dollars that
would have counted against State Street's reported income, as evidenced by State Street's $6.1
billion dollar loss when it consolidated the Conduits in May 2009.
3. The Offering Materials Contained Untrue And Misleading Statements About State Street's Internal Controls
319. On February 15, 2008, State Street filed its Annual Report with the SEC on Form
10-K for the 2007 fiscal year. The Company's Form 10-K contained Sarbanes-Oxley required
99 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 105 of 114
certifications, signed by Defendants Logue and Resch, certifying, inter alia, that they had reviewed the Form 10-K and, to their knowledge the (i) report did not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and (ii) the financial statements and other financial information included in the report fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report.
320. On May 9, 2008, State Street filed its Quarterly Report with the SEC on Form 10-
Q for the 2008 fiscal first quarter ended March 31, 2008. The Company's Form 10-Q contained
Sarbanes-Oxley required certifications, signed by Defendants Logue and Resch, certifying, inter alia, that they had reviewed the first quarter Form 10-Q and, to their knowledge the (i) report did not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and (ii) the financial statements and other financial information included in the report fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report.
321. Defendants' public statements regarding the Company's internal controls were false and misleading when made because contrary to Defendants' representations, State Street lacked adequate internal and financial controls.
E. State Street's Financial Statements Failed To Comply With Gaap
322. For the reasons stated in Section VI, above, State Street was required to consolidate the Conduits in light of its status as the Conduits' "primary beneficiary" in 2007.
100 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 106 of 114
Among other things, starting in 2007, the Conduits began suffering significant losses because of their deteriorating assets, and State Street was implicitly and explicitly obliged to cover those
losses and the majority of the Conduits' losses.
F. Additional Allegations Relevant To The Securities Act Claims
323. Jurisdiction and Venue. The claims asserted herein arise under Sections 11, 12
and 15 (15 U.S.0 §§77k, 771 and 77o) of the Securities Act. This Court has jurisdiction over the
subject matter of this action pursuant to 28 U.S.C. §1331 and §22 of the Securities Act (15
U.S.C. §77v). Venue is proper in this District pursuant to Section 22(a) of the Securities Act (15
U.S.C. § 77v) and 28 U.S.C. § 1391(b). Substantial acts in furtherance of the wrongs alleged
and/or their effects have occurred within this District, and State Street maintains its principal
office in New York, New York. In connection with the acts alleged in these Claims for Relief
under the Securities Act, the Defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.
324. Class Action Allegations. Plaintiffs brings these Securities Act claims as a class
action and incorporate the allegations of Section XII, but expressly exclude any allegations of or
concerning fraud therein, including, without limitation, allegations (including sub-paragraphs) that specifically reference the Exchange Act.
325. Inapplicability of the Safe Harbor. The statutory safe harbor provided for
forward-looking statements under certain circumstances does not apply to any of the allegedly
untrue statements pleaded in this Complaint. The statements herein all relate to then-existing
facts and conditions. In addition, to the extent certain of the statements alleged to be untrue or
misleading may be characterized as forward-looking, they were not adequately identified as
forward-looking statements when made, and there were no meaningful cautionary statements.
101 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 107 of 114
326. Duty to Update. To the extent any of the statements set forth above were not
untrue or misleading when made but became inaccurate or misleading because of subsequent
events or newly discovered information, Defendants had a duty to correct and/or update any such
statements, including any contained in the Offering Materials for the June 2008 Offering.
G. Claims For Relief Under The Securities Act
COUNT III Violations Of Section 11 Of The Securities Act Against State Street, Logue, Resch, the Director Defendants, the Underwriter Defendants and ESLY
327. Plaintiffs repeat and reallege each and every allegation above relating to the
Securities Act claims as if fully set forth herein. This Count does not sound in fraud. Any
allegations of fraud or fraudulent conduct and/or motive are specifically excluded. For purposes
of asserting this and their other claims under the Securities Act, Plaintiffs do not allege that
Defendants acted with intentional, reckless or otherwise fraudulent intent.
328. This Count is asserted against State Street, Officer Defendants Logue and Resch, the Director Defendants, the Underwriter Defendants and the Auditor Defendant for violations
of Section 11 of the Securities Act, 15 U.S.C. § 77k, on behalf of all members of the Class who
purchased or otherwise acquired the securities sold pursuant and/or traceable to the Offering.
329. Liability under this Count is predicated on these Defendants' respective
participation in the Offering, which was conducted pursuant to the Shelf Registration Statement.
The Shelf Registration Statement contained untrue statements and omissions of material fact.
This Count does not sound in fraud. Any allegations of fraud or fraudulent conduct and/or
motive are specifically excluded from this Count. For purposes of asserting this claim under the
Securities Act, Plaintiffs do not allege that Defendants acted with scienter or fraudulent intent,
which are not elements of a Section 11 claim.
102 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 108 of 114
330. The Shelf Registration Statement, which had been updated to incorporate the
documents constituting the Offering Materials, contained untrue statements of material fact and
omitted other facts necessary to make the statements not misleading.
331. In connection with offering the registered securities to the public and the sale of those securities, the Defendants named in this Count, directly or indirectly, used the means and
instrumentalities of interstate commerce, the United States mails and a national securities
exchange.
332. None of the Defendants named in this Count made a reasonable investigation or
possessed reasonable grounds for the belief that the statements contained in the Offering
Materials were accurate and complete in all material respects. Had they exercised reasonable
care, they would have known of the material misstatements and omissions alleged herein.
333. Class members did not know, nor in the exercise of reasonable diligence could
have known, that the Offering Materials contained untrue statements of material fact and
omitted to state material facts required to be stated or necessary to make the statements
particularized above not misleading when they purchased or acquired the registered securities.
334. As a direct and proximate result of the acts and omissions of the Defendants
named in this Count in violation of the Securities Act, the Class suffered substantial damage in
connection with its purchase of State Street common stock sold through the Offering.
335. By reason of the foregoing, the Defendants named in this Count are liable for
violations of Section 11 of the Securities Act to Plaintiffs and the other members of the Class
who purchased or otherwise acquired the securities sold pursuant and/or traceable to the
Offering and the Shelf Registration Statement.
103 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 109 of 114
COUNT IV For Violations Of Section 12(a)(2) Of The Securities Act Against State Street And The Underwriter Defendants
336. Plaintiffs repeat and reallege each and every allegation above relating to the
Securities Act claims as if fully set forth herein. For the purposes of this Count, Plaintiffs assert
only strict liability and negligence claims, and expressly exclude from this count any allegations
of fraud or reckless or intentional misconduct, and expressly exclude from this Count any
allegations of fraud or reckless or intentional misconduct.
337. This Count is asserted against State Street and the Underwriter Defendants for
violations of Section 12(a)(2) of the Securities Act, 15 U.S.C. § 771(a)(2), on behalf of all
members of the Class who purchased or otherwise acquired State Street securities pursuant
and/or traceable to the Offering.
338. State Street and the Underwriter Defendants were sellers, offerors, and/or
solicitors of sales of the securities issued in the Offering pursuant to the Offering Materials.
These Offering Materials, including prospectuses, prospectus supplements and pricing
supplements incorporated therein, contained untrue statements of material fact and omitted
other facts necessary to make the statements not misleading, and failed to disclose material
facts, as set forth in the charts provided herein.
339. By means of the Offering Materials, and by using the means and instruments of transportation and communication in interstate commerce and of the mails, the Defendants
named in this Count, through a public offering, solicited and sold State Street common stock to
members of the Class.
340. Members of the Class purchased State Street common stock by means of the
materially misstated Offering Materials. At the time they purchased shares in the Offering, no
member of the Class knew, or by the reasonable exercise of care could have known, of the
104 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 110 of 114
material misstatements in and omissions from the Offering Materials, which were materially misstated, omitted to state facts necessary to make the statements made not misleading and concealed or failed to adequately disclose material facts as alleged herein.
341. By reason of the foregoing, State Street and the Underwriter Defendants are liable for violations of Section 12(a)(2) of the Securities Act to Plaintiffs and the other members of the Class who purchased securities sold pursuant or traceable to the Offering pursuant to the
Offering Materials.
342. Accordingly, members of the Class who purchased or otherwise acquired State
Street common stock pursuant to the Offering have a right to rescind and recover the consideration paid for their securities and hereby elect to rescind and tender their stock to State
Street and the Underwriter Defendants. And, members of the Class who have sold their State
Street common stock issued in or traceable to the Offering are entitled to recissory damages.
COUNT V For Violations Of Section 15 Of The Securities Act Against Defendants Logue and Resch And The Director Defendants
343. This Count is asserted against Defendants Logue and Resch and the Director
Defendants for violations of Section 15 of the Securities Act, 15 U.S.C. § 77o, on behalf of
Plaintiffs and the other members of the Class who purchased or otherwise acquired State Street securities sold pursuant and/or traceable to the Offering.
344. At times relevant hereto, Logue, Resch and the Director Defendants were controlling persons of State Street within the meaning of Section 15 of the Securities Act.
Logue, Resch, and each of the Director Defendants served as an executive officer and/or director of State Street prior to and at the time of the Offering.
345. Logue, Resch and the Director Defendants at times relevant hereto participated in the operation and management of State Street, and conducted and participated, directly and
105 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 111 of 114
indirectly, in the conduct of State Street's business affairs. As officers and directors of a
publicly owned company, Logue, Resch and the Director Defendants had a duty to disseminate
accurate and truthful information with respect to State Street's financial condition and results of
operations. Because of their positions of control and authority as officers or directors of State
Street, Logue, Resch and the Director Defendants were able to, and did, control the contents of the Shelf Registration Statement, which contained materially untrue financial information.
346. By reason of the foregoing, Logue, Resch and the Director Defendants are liable
under Section 15 of the Securities Act, to the same extent that State Street is liable under
Sections 11, 12(a)(2) of the Securities Act, to Plaintiffs and the other members of the Class who
purchased securities pursuant and/or traceable to the Offering pursuant to the Shelf Registration
Statement and/or the applicable Offering Materials.
XV. PRAYER FOR RELIEF
WHEREFORE, Plaintiffs pray for relief and judgment, as follows:
a. Determining that this action is a proper class action under Rule 23 of the Federal
Rules of Civil Procedure; b. Awarding compensatory damages in favor of Plaintiffs and the other Class
members against all defendants, jointly and severally, for all damages sustained as a result of
Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon; c. Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees;
d. As to the claims set forth under the Securities Act (Sections 11, 12(a)(2) and/or 15), awarding rescission or a recessionary measure of damages; and
e. Such other and further relief as the Court may deem just and proper.
106 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 112 of 114
XVI. JURY DEMAND
Plaintiffs hereby demand a trial by jury.
Dated: June 25, 2010 BERNSTEIN LITOWITZ BERGER BERMAN DEVALERIO & GROSSMANN LLP Peter A. Pease (BBO #392880) By: /s/ John C. Browne One Liberty Square Steven B. Singer (Admitted Pro Hac Vice) Boston, MA 02109 John C. Browne (Admitted Pro Hac Vice) Tel.: (617) 542-8300 Jerald Bien-Willner (Admitted Pro Hac Vice) Fax: (617) 542-1194 Lauren A. McMillen (Admitted Pro Hac Vice) Email: ppease(dThermandevalerio.com 1285 Avenue of the Americas New York, NY 10019 Liaison Counsel for Plaintiffs Tel.: (212) 554-1400 Fax: (212) 501-0300
MOTLEY RICE LLP James M. Hughes 28 Bridgeside Blvd. Mt. Pleasant, SC 29464 Tel.: (843) 216-9000 Fax: (843) 219-9450
William H. Narwold One Corporate Center 20 Church Street, 17th Floor Hartford, CT 06103 Tel.: (860) 882-1676 Fax: (860) 882-1682
Co-Lead Counsel for Lead Plaintiffs and the Proposed Class in the Securities Actions
BARROWAY TOPAZ KESSLER METZLER & CHECK, LLP Stuart L Berman (admission pro hac vice pending) Christopher L. Nelson (admission pro hac vice pending) 280 King of Prussia Road Radnor, PA 19087 Tel: (610) 667-7706 Fax: (610) 667-7056
Additional Counsel for Plaintiff
107 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 113 of 114
MILBERG LLP Joshua H. Vinik (pro hac vice pending) John r. S. Mcfarlane (pro hac vice pending) One Pennsylvania Plaza New York, New York 10119 Tel: (212) 594-5300 Fax: (212) 868-1229
Counsel for Plaintiff Miami Beach Employees Retirement Plan
108 Case 1:09-cv-12146-NG Document 45 Filed 06/25/10 Page 114 of 114
CERTIFICATE OF SERVICE
I, John C. Browne, hereby certify that this document filed through the ECF system will be sent electronically to the registered participants as identified on the Notice of Electronic Filing and paper copies will be sent to those indicated as non-registered participants on June 25, 2010.
Dated: June 25, 2010 /s/ John C. Browne John C. Browne