May 8 (Bloomberg) -- State Street Corp., the largest money manager for institutions, may have to pay more than the $625 million it set aside for damages from lawsuits over losses from subprime-mortgage investments made for pension funds.

Prudential Financial Inc., the second-largest U.S. life insurer, is suing the Boston-based company on behalf of more than 200 retirement plans, alleging that State Street inappropriately invested their money in risky securities. Three other companies filed similar actions.

Neither side has disclosed loss estimates. State Street reported in regulatory filings that the value of assets ``adversely affected'' by the collapse in subprime mortgages fell $7.8 billion to $6.1 billion at the end of 2007, from $13.9 billion on June 30. State Street initially declined to be specific about how much of the drop might constitute damages. Spokeswoman Hannah Grove said today that ``most'' of the fall resulted from redemptions, declining to be specific on losses.

``We are talking very large in terms of damages,'' said Marcia Wagner, 45, a partner at Boston-based Wagner Law Group. The firm specializes in retirement fund and employee-benefit law. She called the $625 million a ``lowball'' figure.

Adam Savett, a vice president at RiskMetrics Group Inc., a New York firm that studies corporate risks, including legal issues, also said the amount at risk may top $1 billion. A sum of $1 billion is about 80 percent of the company's 2007 net income.

Risk Range

``I would say from the hundreds of millions to the billions is what State Street is looking at here'' in possible damages, said Paul Secunda, a law professor at the University of Mississippi who specializes in pension law.

``Most of the difference is due to redemption activity in the funds and not market losses,'' State Street's Grove said, referring to the $7.8 billion drop in value. State Street's reserve is ``currently adequate to satisfy our legal exposure,'' spokeswoman Arlene Roberts said earlier.

Wagner said fund managers hurt by the drop may have an obligation to sue as the existing plaintiffs have.

``To the extent plans were misled into purchasing something they were not authorized to purchase, they may have a fiduciary obligation to sue,'' said the lawyer, who isn't representing the investment manager or plaintiffs.

``It's sue or be sued,'' she said. ``They allowed bad investments, so they should be attempting to make the plans whole. State Street is quite exposed, especially if one of its affiliates rendered advice or marketed the funds to be something they were not.''

$1 Billion Minimum

State Street will probably have to pay a minimum of $1 billion, according to William Fredericks, 46, attorney for plaintiff Unisystems Inc., a closely held New York publisher.

``Based on public disclosures to date, damages should certainly be in the 10 figures,'' said the lawyer from Bernstein Litowitz Berger & Grossmann in New York.

Three corporate retirement and welfare funds have asked the U.S. District Court in Manhattan to consider granting class- action status, which allows others with similar claims to join a case and share litigation expenses.

The companies are Unisystems; Nashua Corp., a maker of print-imaging products in Nashua, New Hampshire; and Merrimack Mutual Fire Insurance Co., based in Andover, Massachusetts.

The possibility of facing a class-action suit raises the financial stakes for State Street, said Savett, of RiskMetrics.

``When you have a class action, and it's composed of hundreds or thousands of people, that starts to mean eye-opening amounts of damages,'' Savett said.

Class-Action Test

To achieve group-lawsuit status, the funds need to show that their cases have common facts, said John Coffee, a securities law professor at Columbia University in New York.

``The common issue will be, did they all get the same advice?'' Coffee said. Even without class-action status, the pension plans may still sue separately because the size of the claims justifies the cost of individual cases, Coffee said.

The New York suits were filed under the federal Employee Retirement Income Security Act, or Erisa. Plaintiffs claim State Street breached its fiduciary duty by investing pensioners' money in high-risk securities instead of the conservative funds promised.

That kind of accusation is easier to prove than fraud, a claim non-pension plaintiffs would have to make, said Patrick DiCarlo, a lawyer at Atlanta-based Alston & Bird, which isn't involved in the case.

Fraud, Imprudence

``In your classic securities-fraud context, you have to prove a fraudulent intent,'' DiCarlo said. ``Here, all you have to prove is that the investment is imprudent.''

Success against State Street might lead to similar litigation against other companies, DiCarlo said.

Suits against investment advisers including Regions Financial Corp.'s Morgan Keegan unit are being studied, according to Derek Loeser of the Seattle law firm Keller Rohrback, which represents the plaintiffs seeking class-action status.

``With there not being any litigation in place, we don't have anything to comment on,'' Morgan Keegan spokeswoman Kathy Ridley said.

``You will absolutely see something like this State Street litigation against another company,'' said RiskMetrics' Savett, who tracks securities and Erisa cases related to the subprime lending crisis. He said he knows of none so far.

Loeser said he expects State Street to become a target of more suits, particularly from public-sector pension funds.

Houston Suits

The company was also sued over pension-fund losses by the Houston police officers' pension system, the Memorial Hermann Healthcare System in Houston and the Welborn Baptist Foundation in Evansville, Indiana. Those cases don't include Erisa claims.

Litigation makes investors uneasy about the shares, analysts said.

``It's certainly a dark cloud,'' said Gerard Cassidy of RBC Capital Markets in Portland, Maine. ``It's another reason why investors have to be cautious on this stock.'' He rates State Street sector perform, equivalent to a ``hold'' recommendation.

Nine analysts label the company ``buy,'' and 10 recommend holding it, according to Bloomberg data. State Street fell $1.27, or 1.7 percent, to $72.73 in New York Stock Exchange composite trading.

The company is up 4.8 percent for the past 12 months, versus a 7.3 percent decline in the Standard & Poor's 500 Index and a 31 percent drop in the S&P 500 Financials Index.

The cases are combined in In re State Street Bank and Trust Co. Erisa Litigation, 1:07-cv-08488, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Carlyn Kolker in New York at ckolker@bloomberg.net.

Last Updated: May 8, 2008 16:52 EDT