Corporate & Securities Law

The SEC has charged State Street for misleading investors about subprime mortgage investments and the Boston-based firm has agreed to settle those charges by repaying fund investors more than $300 million. State Street has agreed to settle the SEC's charges by paying more than $300 million that will be distributed to investors who lost money during the subprime market meltdown in 2007.  This payment is in addition to nearly $350 million that State Street previously agreed to pay to investors in State Street funds to settle private claims.

"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.

The enforcement action is a result of joint efforts by the SEC, the Massachusetts Securities Division and the Massachusetts Attorney General's office, which both announced related charges against State Street.  According to the SEC's complaint filed in federal court in Boston and a related administrative order issued by the Commission, State Street established its Limited Duration Bond Fund in 2002 and marketed it as an "enhanced cash" investment strategy that was an alternative to a money market fund for certain types of investors.

By 2007, however, the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives that magnified its exposure to subprime securities.  But State Street continued to describe the fund to prospective and current investors as having better sector diversification than a typical money market fund, and failed to disclose the extent of the fund's concentration in subprime investments.

According to the SEC's complaint and order, State Street sent investors a series of misleading communications beginning in July 2007 concerning the effect of the turmoil in the subprime market on the Limited Duration Bond Fund and other State Street funds that invested in it.  At the same time, however, State Street provided particular investors with more complete information about the fund's subprime concentration and other problems with the fund.  These other investors included clients of State Street's internal advisory groups, which provided advisory services to some investors in this fund and related funds.

The SEC alleges 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.  The SEC alleges 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.

SNSFE is continuing to investigate this advanced form of pump and dump.

Source:  SEC Press Release 2010-21