State Street Charged by SEC with Misleading Investors

Boston, Massachusetts-based financial firm State Street Bank and Trust Company was charged by the Securities and Exchange Commission (SEC) last week with misleading investors about subprime investment exposure. Further, State Street was charged with selectively disclosing a more complete set of facts to certain investors.

State Street, who has already agreed to settle these charges against it, will pay more than $300 million to investors who lost money during the subprime market collapse in 2007. Robert Khuzami, the new Director of the SEC’s Division of Enforcement, had this to say on the matter: "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.” The actual investments in question stem from State Street’s Limited Duration Bond Fund, among others.

The Limited Duration Bond Fund was marketed beginning in 2002 as an alternative to a money market fund, labeling it an “enhanced cash” investment strategy. Regardless of how it was marketed, the way it performed in 2007 after being loaded with subprime residential mortgage-backed securities and derivatives was disastrous.

Prior to the collapse, State Street informed their internal advisory group of the precarious situation of the fund and this select group of investors recommended that their clients redeem their investments from all related funds. In the ensuing selloff, State Street sold most of the funds’ liquid assets to pay off the redemption demands of the select group of better informed investors. This depletion of liquid assets magnified the loss that other investors felt when they too eventually tried to pull their assets out of the Limited Duration Bond Fund and other funds.

Of the announced settlement, $255 million will go towards compensating investors who lost money in State Street funds. This amount is in addition to the $350 million State Street has already paid or agreed to pay to certain investors through private settlements and lawsuits.