Massachusetts's securities regulator fined State Street (STT) $5 million for allegedly failing to disclose a hedge fund's involvement in a $1.56 billion deal that lost $450 million for investors.

Secretary of the Commonwealth William Galvin said Tuesday that State Street, which was investment manager on the transaction, didn't tell investors that a hedge fund called Magnetar helped create the underlying portfolio and was taking a short position against all or some of it.

The deal was a collateralized debt obligation called Carina CDO Ltd. Deutsche Bank (DB) approached State Street in 2006, offering a $3.5 million fee to it to manage the portfolio.

Galvin said State Street was "instrumental" in creating the marketing materials for Carina and actively involved in meeting investors and drumming up interest but it didn't disclose Magnetar's involvement in recommending securities that should be purchased by the CDO nor Magnetar's trading position betting against it.

State Street will pay a civil penalty of $1.5 million and disgorge $3.5 million of fees, profits and commissions. It reached the settlement without admitting or denying the findings.

A State Street spokeswoman was not immediately available.

--By Liz Moyer, Dow Jones Newswires; 212-416-2512; liz.moyer@dowjones.com

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