The subprime collapse just came back to haunt State Street Global Advisors
yet again. On Thursday the Securities and Exchange Commission
(SEC) and the Secretary of the Commonwealth of Massachusetts, William Galvin
a settlement of more than $300 million with SSgA's parent, Boston-based State Street Bank and Trust Company, for allegedly "misleading ... investors about their exposure to subprime investments while selectively disclosing more complete information to specific investors."
When the subprime collapse hit State Street and some of its investment products (including the SSgA Yield-Plus Fund
and its Limited Duration Bond Fund
) in 2007, the firm set aside about $625 million in reserve to cover litigation; by August, that reserve only boasted about $194 million (thanks to the nearly $350 million State Street already paid out in settlements with private investors). Yet State Street confirmed that the reserve will cover the costs of the new settlement.
The SEC first served State Street with a related Wells Notice last summer.
"State 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," stated Robert Khuzami
, director for the SEC's division of enforcement.
"We were determined to work with our regulators and our customers to resolve their concerns around investments in certain of SSgA's active fixed-income strategies in 2007," added Ron Logue
, chairman and CEO of State Street.
Washington, D.C., Feb. 4, 2010 – The Securities and Exchange Commission today charged Boston-based State Street Bank and Trust Company with misleading its investors about their exposure to subprime investments while selectively disclosing more complete information to specific investors.
State Street has agreed to settle the SEC’s charges by paying more than $300 million that will be distributed to investors who lost money during the subprime market meltdown in 2007. This payment is in addition to nearly $350 million that State Street previously agreed to pay to investors in State Street funds to settle private claims.
“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,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Investigating potential securities law violations arising out of the credit crisis remains a high priority for the SEC Enforcement Division.”
The enforcement action is the result of joint efforts by the SEC with the Massachusetts Securities Division and the Massachusetts Attorney General’s office, which both announced related charges against State Street today.
David P. Bergers, Director of the SEC’s Boston Regional Office, said, “State Street informed certain investors and left others in the dark about their subprime mortgage exposure. This global settlement will ensure that harmed investors are compensated.”
According to the SEC’s complaint filed in federal court in Boston and a related administrative order issued by the Commission, State Street established its Limited Duration Bond Fund in 2002 and marketed it as an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors.
By 2007, however, the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives that magnified its exposure to subprime securities. But State Street continued to describe the fund to prospective and current investors as having better sector diversification than a typical money market fund, and failed to disclose the extent of the fund’s concentration in subprime investments.
According to the SEC’s complaint and order, State Street sent investors a series of misleading communications beginning in July 2007 concerning the effect of the turmoil in the subprime market on the Limited Duration Bond Fund and other State Street funds that invested in it. At the same time, however, State Street provided particular investors with more complete information about the fund’s subprime concentration and other problems with the fund. These other investors included clients of State Street’s internal advisory groups, which provided advisory services to some investors in this fund and related funds.
The SEC alleges that, based on this more complete information, State Street’s internal advisory groups subsequently decided to recommend that all of their clients including the pension plan of State Street’s publicly-traded parent company (State Street Corporation) redeem their investments from the fund and the related funds. The SEC alleges that State Street sold the fund’s most liquid holdings and used the cash it received from these sales to meet the redemption demands of better informed investors, leaving the fund and its remaining investors with largely illiquid holdings.
Under the terms of the settlement, State Street agreed to pay a $50 million penalty, more than $8.3 million in disgorgement and prejudgment interest, and more than $255 million in additional payments to compensate investors. Combined with nearly $350 million that State Street has already paid or agreed to pay some investors through settlements of private lawsuits, the total compensation to harmed State Street investors is approximately $663 million.
State Street also was ordered to cease and desist from any further violations of certain securities laws. The SEC’s enforcement action took into account the company’s remediation and its cooperation, including:
* Replacement of key senior personnel and portfolio managers.
* Conducting a review of its procedures and revised its risk controls.
* Entering into private settlements with harmed investors.
* Recent agreement – pursuant to a limited privilege waiver – to provide information it was not otherwise obligated to provide to enable the SEC to assess the potential liability of individuals with respect to certain investor communications.
The SEC’s investigation is ongoing. The Commission appreciates the assistance of the offices of Secretary of the Commonwealth of Massachusetts William F Galvin and Massachusetts Attorney General Martha Coakley.
Company Press Release
BOSTON, February 4, 2010 – State Street Corporation (NYSE: STT) today announced that it has entered into settlements with the Securities and Exchange Commission (SEC), the Massachusetts Attorney General and the Massachusetts Securities Division of the Office of the Secretary of State to resolve their investigations into losses incurred by and disclosures made around certain active fixed-income strategies managed by State Street Global Advisors (SSgA) during 2007 and earlier periods. In reaching these settlements, State Street has not admitted or denied the allegations made by the regulators.
Under the terms of the agreement with the SEC, State Street has agreed to establish a $313 million fair fund, which includes a fine of $50 million and disgorgement of advisory fees and interest of approximately $8 million. Combined with the approximately $350 million in prior client settlements, the total compensation to investors will be approximately $663 million. The allocation of the payments from the fair fund to former investors in the active fixed-income funds has been agreed upon with the SEC. Under the settlements with the Commonwealth of Massachusetts, State Street has agreed to pay $10 million to each of the Massachusetts
Secretary of State and the Massachusetts Attorney General. State Street’s previously established legal reserve will fully cover the cost of the settlements.
Ronald E. Logue, State Street’s chairman and chief executive officer said, “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. We remain committed to building on SSgA’s comprehensive organizational and infrastructure changes implemented over the past 24 months to ensure that our practices not only meet but exceed industry standards.”
About State Street Corporation
State Street Corporation (NYSE: STT) is one of the world's leading providers of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $18.8 trillion in assets under custody and administration and $1.9 trillion in assets under management at December 31, 2009, State Street operates in 25 countries and more than 100 geographic markets worldwide. For more information, visit State Street’s web site at www.statestreet.com.
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