SEC Charges State Street Over Subprime Mortgage Investments

Boston-based State Street Corp. (STT)agreed to pay more than $300 million on Thursday to settle civil charges by the U.S. Securities and Exchange Commission alleging the bank misled investors about its exposure to subprime mortgages.

In a civil complaint filed in a Boston federal court and a related administrative order, the SEC said the bank selectively disclosed information about its subprime mortgage investments to specific investors. The settlement money will go to investors who lost money during the 2007 subprime market meltdown. The settlement is in addition to nearly $350 million the bank previously agreed to pay to settle private claims, the agency said.

"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, the 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."

State Street spokeswoman Arlene Roberts said the company believes that the settlement is "in the best interest of both our clients and our business."

The SEC alleges in its complaint against State Street that the bank established a "Limited Duration Bond Fund" in 2002 and marketed the fund as an "enhanced cash" investment strategy as an alternative to a money market fund, which is typically a very safe investment.

By 2007, however, the SEC said the fund was almost entirely invested in residential subprime mortgage-backed securities and derivatives.

Despite its heavy exposure to those toxic products, the SEC says State Street continued to describe the fund as having better sector diversification than regular money market funds and did not disclose the extent of its exposure to subprime investments.

In July 2007, the SEC said State Street sent investors misleading communications about the problems in the subprime market and its effect on the fund. But some investors received more complete information than others, including clients of State Street's internal advisory groups, the SEC said. Based on the information they received, those internal groups recommended that clients should redeem their investments.

Among the clients that received such advice included the pension fund for State Street Bank's publicly-traded parent company State Street Corporation, the SEC added.

State Street then sold the fund's most liquid holdings and used the cash to meet redemption demands of "better informed investors," the SEC said.

The SEC said in its talks with the bank over the allegations, it took into account the bank's efforts to remediate the situation.

Those actions included: the replacement of key senior personnel; entering into private settlements with investors; and agreeing to conduct a review of its procedures. In addition, the SEC said the bank agreed to privede private information it was not obligated to give the SEC to help the agency assess liability issues.

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com.

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