Boston-based State Street Corp. is facing a suit from Unisystems for investing "conservative, risk-averse bond funds" in high-risk, mortgage-backed securities, Bloomberg Business News reported, citing statements from two law firms.

The complaint, a purported class action filed in Manhattan federal court, asserts that State Street breached its fiduciary duties under the U.S. Employee Retirement Income Security Act. Unisystems, a New York publisher, seeks to recover losses on behalf of all retirement funds that invested in State Street-managed bond funds between January and this month.

"As a result of those imprudent investments, bond funds managed by State Street, which were supposed to track a well- defined index of investment-grade U.S. government and corporate bonds, lost up to 40 percent of their value when the market for mortgage-backed securities collapsed in August 2007," lawyers for Unisystems said in a statement distributed by Marketwire.

Prudential Financial Inc. sued State Street in the same court Oct. 1 over mortgage-related losses affecting 28,000 retirement plan clients. Reimbursing them will cost Prudential $80 million before taxes. State Street changed the investment strategies of two bond funds to make "undisclosed, highly leveraged investments in mortgage-related" assets, the insurer said in that complaint. Some of the investments were linked to subprime home loans, Prudential said. State Street said it would "vigorously" defend itself, Bloomberg reported.

State Street, the largest U.S. money manager for institutions, raised its 2007 earnings-growth forecast on Oct. 16 to more than 15 percent, easing concern results would be hurt by the credit-market freeze. Its shares rose the most in 2 1/2 years.

The company previously expected earnings per share to increase 10 percent to 15 percent. Third-quarter net income rose 29 percent to $358 million, or 91 cents a share, from $278 million, or 83 cents, a year earlier.

Fixed income makes up $244 billion, or about 12 percent, of State Street's assets.

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