A series of announcements today from State Street, the Securities and Exchange Commission (SEC) ,and the offices of Massachusetts Secretary of the Commonwealth William Galvin and Attorney General Martha Coakley indicated that State Street would set up a $313-million investor reimbursement fund as part of its SEC settlement (see “SEC to Consider SSgA Charges on Fixed-Income Fund Activities”). The figure includes a fine of $50 million and disgorgement of advisory fees and interest of approximately $8 million.
State Street will also pay $10 million each to Galvin and Coakley’s offices to settle related state allegations, according to the announcements. With the approximately $350 million in earlier settlements of related private civil cases, State Street is set to pay about $663 million in total in the subprime mortgage matter. In its statement, the company said the money already set aside for its legal costs will cover the settlements.
Noting that the company has not formally admitted or denied the regulators’ allegations, State Street’s Chairman and CEO Ronald E. Logue said State Street is confident organizational actions it has already taken will help make certain there are no more related problems. The SEC said the State Street organizational actions included replacement of key senior personnel and portfolio managers, a review of its procedures, and a revision of risk controls.
“We value our reputation as a trusted fiduciary to institutions around the world and we recognize the critical importance of fulfilling our fiduciary obligations,” Logue said in the statement. “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.”A More Accurate Information Release
In addition to the allegations that State Street misrepresented the
potential dangers of some of its funds to certain investors, the SEC
also charged that the company released more accurate information to
other investors including clients of State Street's internal advisory
groups, which provided advisory services to investors in some of the
The SEC alleged 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.
Federal regulators alleged 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.
"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, in the SEC statement.
Coakley’s office charged that investors in approximately 40 State
Street funds were affected, including the Limited Duration Bond Fund ,
Bond Market Common Trust Fund, Bond Market Non-Lending Fund,
Intermediate Bond Common Trust Fund, and Short Term Bond Common Trust
More information about the SEC case is available here.