State keeps quiet about victory in settlement

Posted: Tuesday, January 29, 2008

The Alaska Department of Revenue won a big settlement for state workers and retirees, but agreed to keep quiet about its victory.

That might help State Street Global Advisors avoid making similar payouts elsewhere, after state revenue officials say the Boston-based investment firm mismanaged a state retirement fund.

It also could mean that State Street and the department end up with more money than they might have if they publicized the deal.

If those who lost money don't respond to the state and agree to the settlement amount - and not all have - State Street and the Department of Revenue keep the money.

State Sen. Kim Elton, D-Juneau, said the settlement wasn't entirely as promised. He thinks the state should have advertised the payment arrangement in more than just a letter to state employees so they don't miss their chance at the settlement money.

"This was portrayed as a settlement that protected Alaskans, not just protected Alaskans if they were alert," he said.

It was not the intent of the Department of Revenue to keep any of the money, said Mike Barnhill, associate attorney general in the Department of Law's Labor and State Affairs Section.

"Our goal is obviously to pay out 100 percent of the money," Barnhill said.

Alaska was among the first entities to pull its members' money out of the State Street Global Advisors Daily Corporate/Government Bond Fund when it began posting returns different from the bond index it was supposed to track in August.

Revenue officials said State Street had inappropriately changed investment styles and began investing in mortgage-backed securities, instead of the more stable corporate and government bonds that had been advertised.

Several corporations sued State Street on behalf of their retirement plans to make up the losses, but Alaska did not. Instead, it began negotiating its own settlement.

On Dec. 20, Alaska reached an agreement with State Street that Department of Revenue officials said would reimburse its employees and retirees, replacing both $5.65 million in losses to the principal, as well as lost earnings.

That agreement required State Street and the Department of Revenue to split the cost of making up the losses to the retirement plan members.

The Department of Revenue soon thereafter sent out letters to all 1,300 members who had suffered loses in varying amounts. Many were relatively small amounts, but one retiree lost nearly $70,000.

To date, nearly $1 million has yet to be claimed. Under the agreement, State Street and the Department of Revenue will get to keep that money if it is not claimed.

That settlement was not made public until an inquiry from the Juneau Empire this month.

The reason it wasn't made public was the settlement agreement contained a clause, agreed to by the state, barring it from making news of the settlement public. The agreement also included the wording of the letter to be sent to plan members telling them of the settlement and their ability to get reimbursed.

Barnhill declined to say why the state had agreed to the "no press release" clause, or even who had proposed it, and referred further questions to State Street.

State Street spokeswoman Arlene Roberts said the company did not comment on settlements.

Barnhill said the lack of a press release was not important, because not all the affected members would have seen it anyway.

"Not everybody lives in Juneau," he said. "A lot of these people live outside Juneau, or outside the state."

"A press release is irrelevant," he said.

The biggest beneficiary of keeping the settlement quiet is likely to be State Street. Its losses in Alaska were relatively small, compared to reported losses elsewhere, and State Street has set aside $618 million to pay costs associated with those lawsuits and claims.

At the same time the two parties reached an agreement, they also reached a side agreement that the retirement plan members weren't told about. State Street waived investment management fees for the Department of Revenue that likely would have totaled $3,268,480, Barnhill said.

The combination of how the reimbursements were structured and keeping the settlement secret from other State Street customers could help keep others negotiating settlements from knowing how good a deal Alaskans got.

Another provision of the settlement agreement bars Alaska officials from saying publicly how good the deal was, but its replacement of both principal and earnings appears to exceed typical securities litigation settlements.

The settlement allows the Department of Revenue to profit as well, if it doesn't pay out the maximum amount possible.

That was not the idea behind the secrecy provision, Barnhill said, saying it was "ridiculous" to suggest the state was trying to profit from the settlement.

• Contact reporter Pat Forgey at523-2250 or by e-mial at patrick.forgey@juneauempire.com.



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