State Street [see profile] just defeated a lawsuit over its YieldPlus Fund. On Thursday a federal judge in New York dismissed the suit against the Boston-based custodian and mutual fund firm. Yet fundsters may not be too pleased with the judge's logic.

Money Management Executive's Chris Kentouris reported on the news.

The case, which hinged on State Street allegedly straying from the investment strategy outlined in the fund's prospectus and misleading investors as to how much of the fund was in mortgage-backed securities, is not completely over. The ruling was issued by a federal district court judge, Richard Howell, and is thus subject to appeal to a higher court.

Additionally, the judge seemed to have doubts about the implications of his own ruling and even called on Congress to address what he called "a loophole for fraudulent misrepresentations by mutual fund managers."

"If this is so, closing the loophole requires legislative action," Judge Howell wrote. "The Court is constrained by the plain language of sections 11(e) and 12(a)(2) [of the Securities Act of 1933], which requires a connection between the alleged material misstatement and a diminution in the security's value ... Here, where the NAV does not react to the misstatements in the Fund's prospectus, no connection between the alleged material misstatement and a diminution in the security's value has been or could be alleged." 

Edited by: Neil Anderson, Managing Editor


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