State Street Pays $663m to Settle SEC Investigation
Financial services firm State Street Corp. (STT) negotiated a settlement to satisfy an ongoing investigation into losses absorbed by investors in fixed-income strategies run by State Street Global Advisors during 2007. The Securities and Exchange Commission (SEC) charged State Street with allegedly misleading investors about the presence of subprime mortgage investments in its asset-backed securities (ABS) investment portfolio. State Street was quick to note in its press release Thursday that it does neither admits or denies the SEC allegations by reaching financial settlement. “We value our reputation as a trusted fiduciary to institutions around the world and we recognize the critical importance of fulfilling our fiduciary obligations," said State Street chairman and CEO Ronald Logue. "As such, we were determined to work with our regulators and with our customers to resolve their concerns around investments in certain... fixed-income strategies in 2007.” The firm will establish a $313m fair fund, including a $50m fine and $8m of advisory fees and interest. These funds will be paid on top of $350m of prior client settlements, bringing State Street's total compensation to investors up to $663m. The SEC previously ordered State Street to cease and desist from activities violating securities laws. The complaint and order (download here) claimed State Street included subprime mortgage investments within the ABS category, leading clients to believe they were investing in securities backed by other asset types than subprime residential mortgages. The SEC also claimed State Street misrepresented the share of derivatives securities in its portfolio, and therefore the overall risk. Eventually the investors lost "hundreds of millions of dollars during the subprime market meltdown in mid-2007," according to the SEC's order. "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 SEC enforcement division director Robert Khuzami in a press statement. He added: "Investigating potential securities law violations arising out of the credit crisis remains a high priority for the SEC Enforcement Division." The SEC has partnered with the Massachusetts Securities Division and the Massachusetts Attorney General to file the charges against State Street. As part of the financial settlement, State Street will pay $10m each to the Massachusetts Secretary of State and the Massachusetts AG. Write to Diana Golobay. Disclosure: The author holds no relevant investments.