Boston investment banking giant State Street Corp. said on Wednesday fourth-quarter net income nearly doubled, beating market expectations, even as a class action lawsuit was brought against the company on behalf of investors for taking undue risks.
State Street, which also earns fees for offering services like record-keeping to mutual and hedge funds, said net income rose to $498 million, or $1 per share, from $256 million, or 54 cents a share, a year earlier.
Excluding items, earnings per share totaled 99 cents, beating the average analysts’ forecast of 97 cents, according to Thomson Reuters I/B/E/S.
Shares of State Street rose 2.5 percent to $44.30 in trading before the market opened.
Unrealized losses on the company’s investment portfolio, which totaled $2.98 billion at the end of the third quarter, shrank further to stand at $2.29 billion. State Street has won praise for cutting the risk in its portfolio significantly in 2009, and analysts said it was no longer as potentially dangerous to the company as it had been in the first part of the year.
Assets under custody and administration stood at $18.79 trillion, up 18 percent from a year ago, while assets under management were $1.9 trillion, up 32 percent.
Revenue fell to $2.28 billion from $2.67 billion. Although servicing fees rose 5 percent to $882 million and investment management fees climbed 11 percent to $231 million, trading services revenue, which includes foreign exchange trading, and brokerage and other fees, tumbled 35 percent to $270 million.
A large decline came in both foreign exchange revenue and securities finance revenue amid lower trading volumes, which also hurt State Street’s rivals.
The company said it expected revenue to increase this year as it completes its planned acquisition of the securities servicing arm of Intesa Sanpaolo, one of the Italy’s biggest retail banks. State Street has long said that it wants to earn half of its revenue overseas.
But Joseph Hooley, who will replace Chief Executive Officer Ronald Logue on March 1, sounded a note of caution, saying State Street will face "headwinds" as the economy recovers slowly.
There is a damper on the positive earnings news, however. The law firm of Berman DeValerio announced today it has filed a class action lawsuit against State Street alleging violations of the federal securities laws.
Berman DeValerio filed the complaint Jan. 15 in the U.S. District Court for the District of Massachusetts on behalf of those who purchased State Street’s publicly traded securities between Oct. 17, 2006 and Oct. 19, 2009. The complaint was also filed on behalf of investors who purchased State Street’s common stock pursuant and/or traceable to a June 3, 2008 registered public offering.
The complaint alleges State Street misrepresented its financial condition, including the company’s exposure to billions of dollars in losses and the fraudulent inflation of the company’s trading revenues. The action seeks to recover losses under the Securities Act of 1933 and the Securities Exchange Act of 1934.
According to the complaint, State Street took on significant undisclosed risks and failed to disclose losses when those risks materialized, misleading investors about the company’s exposure to billions of dollars in losses arising from off-balance-sheet conduits, the company’s securities lending program and its own investment portfolio.
Instead of disclosing these mounting problems, the complaint alleges, State Street sought to shore up its capital position by issuing materially false and misleading materials, filed with the SEC, that enabled the company to raise approximately $2.8 billion in the June 2008 offering.
When the problems finally came to light, the value of State Street securities plummeted, wiping out $9 billion in market capitalization in a single day. Specifically, when State Street disclosed massive losses and additional risks after the close of the markets on Jan. 16, 2009 the company’s stock fell from a close of $36.35 per share on Jan. 16, 2009 to close at $14.89 per share the next trading day, Jan. 20, 2009. Furthermore, the complaint said, State Street stock fell another $4.41 per share when it was disclosed in October 2009 that the company had been systematically overcharging its institutional clients for almost a decade through an illegal scheme involving foreign currency trades.
