State Street to pay $300 million in SEC subprime case

By Svea Herbst-Bayliss and Karey Wutkowski

BOSTON/WASHINGTON (BestGrowthStock) – State Street Corp agreed on Thursday to reimburse investors over $300 million to settle federal and state charges that the world’s second-largest institutional money manager misled clients about investments in subprime mortgages at the start of the credit crisis, the U.S. Securities and Exchange Commission said.

The commission charged that the Boston-based company’s investment arm had selectively disclosed information to investors in its Limited Duration Bond Fund about the portfolio’s plunging returns in 2007.

The fund, which had managed $1.4 billion, was aimed at pension funds and other investors who wanted slightly better returns than what money market funds were paying but with only slightly more risk. The fund had tumbled about 37 percent during the first three weeks of August 2007.

“State Street led investors to believe that their investments were more diversified than a typical money market portfolio, when instead they were invested almost entirely in subprime investments that ultimately caused hundreds of millions of dollars in losses,” SEC enforcement director Robert Khuzami said in a statement.

Khuzami said investigating violations connected to the subprime crisis and financial meltdown remains a priority for the SEC.

“Investors relied on State Street to tell them the truth so they could make informed investment decisions, and State Street let them down,” said David Bergers, director of the SEC’s Boston-based office.

The company, which invests $1.9 trillion for clients and oversees another $18.8 trillion in assets under custody, said it agreed to pay $50 million in penalties, more than $8.3 million in disgorgement and prejudgment interest, and more than $255 million in additional payments to compensate investors. The penalties include a $10 million fine to both Massachusetts’ Attorney General’s office and the Secretary of State’s office.

“I’m not happy that they are doling out money to all the agencies that they seem to be doling it out to, including the Massachusetts Attorney General, but I’m glad that they’ve gotten it behind them,” said analyst Nancy Bush, who heads NAB Research.

State Street, an icon in the investment industry since its founding 218 years ago, had already paid out about $350 million to settle lawsuits brought by private investors.

Prudential Financial Inc, for instance, sued State Street in 2007, charging that it had lost $80 million for thousands of investors in Prudential’s retirement plans.

The payments will be covered by State Street’s legal reserve fund, which it originally set up in 2007 and stocked up last year.

In October, months after the heavy losses were first reported, State Street’s chief executive, Ron Logue, touched on the fixed income problem only briefly on an earnings call when he told analysts he was disappointed by the poor performance at a small number of fixed income funds.

In November, three executives — Sean Flannery, SSgA’s chief North American investment officer; Paul Greff, director of global fixed income; and Michael O’Hara, head of active global fixed income — left the company.

In early January 2008, the company announced that William Hunt, who had run SSgA, had resigned.

The settlement comes only weeks before Logue, who took significant steps to reduce risk-taking at the company as the credit crisis ballooned, will retire on March 1. State Street was among a large number of U.S. financial firms that took government bailout money and was one of the first to pay it back in 2009.

“We value our reputation as a trusted fiduciary to institutions around the world and we recognize the critical importance of fulfilling our fiduciary obligations. As such, we were determined to work with our regulators and with our customers to resolve their concerns around investments in certain of SSgA’s active fixed-income strategies in 2007,” Logue said in a statement.

Stock Market News

(Additional reporting by Elinor Comlay in New York, editing by Gerald E. McCormick, Gary Hill)

State Street to pay $300 million in SEC subprime case