Compliance September 30, 2010

SEC Charges Two in State Street Subprime Mortgage Case

The Securities and Exchange Commission (SEC) has charged a pair of former State Street Bank and Trust Company employees with misleading investors about their exposure to subprime investments.
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A news release said the agency alleges that John P. Flannery and James D. Hopkins marketed State Street’s Limited Duration Bond Fund as an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors.

However, according to the SEC, by 2007 the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives, but continued to be described as less risky than a typical money market fund. The extent of its concentration in subprime investments was not disclosed to investors.

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Flannery was a chief investment officer at State Street, while Hopkins was a product engineer who the SEC said is currently State Street’s head of product engineering for North America. The Wall Street Journal reported Hopkins had also left the company.

The SEC alleged both men “played an instrumental role in drafting a series of misleading communications to investors.”

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Allegation Details  

According to the SEC's order, the misleading communications to investors related to the effect of the turmoil in the subprime market on the Limited Duration Bond Fund (established in 2002) and other State Street funds that invested in it. State Street provided certain investors with more complete information about the fund's subprime concentration and other problems with the fund. These better-notified investors included clients of State Street's internal advisory groups, which provided advisory services to some of the investors in the fund and the related funds, the SEC charged.

The regulator further alleged that State Street's internal advisory groups, one of which reported directly to Flannery, decided to recommend all their clients redeem from the fund and the related funds. The pension plan of State Street's parent company, State Street Corporation, was one of those clients.

At the direction of Flannery and State Street's Investment Committee, 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, the SEC said. This left the fund and its remaining investors with largely illiquid holdings.

In the settlement with the firm announced jointly by the SEC and the offices of Massachusetts Secretary of State William F. Galvin and Massachusetts Attorney General Martha Coakley earlier this year, State Street agreed to pay more than $300 million to investors who lost money during the subprime market meltdown in 2007 (see State Street Settles Subprime Mortgage Charges with State, Feds).

State Street distributed those funds to investors in February and March and has also paid nearly $350 million to investors to settle private lawsuits.

Compliance September 30, 2010

BP Lawyers Say Lawsuits Should be Combined

Lawsuits by workers claiming BP Plc’s North American unit mismanaged their retirement savings plan should be sent to the Texas court already handling investor claims prompted by the Gulf of Mexico oil spill, company lawyers told a panel of judges.
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Bloomberg reports that the employees previously asked that the suits be combined in Chicago, where the retirement plan is administered and where seven of the eight suits were filed. But BP told the seven-judge multidistrict litigation panel that the cases belong in Houston because the claims are similar to those in other investor suits.   

“The important thing to focus on here is the vast overlap in discovery,” or evidence-gathering, Daryl Libow, BP’s attorney, told the judges, according to Bloomberg. “Five of the seven members of the employee plan oversight committee are in Houston.”   

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However, lawyers for the workers pointed out in court papers that the key legal issue in their actions is whether the company stock was a prudent investment for the plan during the class period, which is not an issue in the securities actions.  

In the suits, filed as class actions on behalf of all U.S. employees participating in the company’s retirement savings plan, workers claim losses of more than $1 billion from the stock plunge after the April 20 spill. The employees claim that BP Corp. North America Inc. and members of the savings plan committee breached their fiduciary duty under the Employee Retirement Income Security Act to the investors in the BP stock fund (see FL Woman Sues BP Over 401(k) Stock Losses).  

The workers claim BP should have known that inadequate safety measures in place by the company made the company stock a no longer prudent investment.   

The news report said BP is facing more than 400 lawsuits over the offshore oil spill caused by the April 20 explosion of the Deepwater Horizon rig in the Gulf of Mexico. Claims by fisherman, restaurants, real estate interests, governments and others for economic losses have been combined with personal injury and wrongful-death suits for pretrial treatment in a multidistrict litigation in federal court in New Orleans.   

The multidistrict litigation panel in August consolidated lawsuits over claims that the company misled investors before and after the spill and sent those cases to a judge in Houston. The panel told the workers’ lawyers last month to show why their cases shouldn’t go there as well.  

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