State Street Settles Subprime Mortgage Charges with State, Feds

February 4, 2010 (PLANSPONSOR.com) – State Street Corporation has agreed to pay $333 million as part of a series of settlements with state and federal regulators over allegations it misled investors about the potential danger of heavy subprime-mortgage holdings in its Limited Duration Bond Fund and other offerings.

A series of announcements Thursday from State Street, the Securities and Exchange Commission (SEC) and the offices of Massachusetts Secretary of the Commonwealth William Galvin and Attorney General Martha Coakley indicated that State Street would set up a $313-million investor reimbursement fund as part of its SEC settlement (see SEC to Consider SSgA Charges on Fixed Income Fund Activities). The figure includes a fine of $50 million and disgorgement of advisory fees and interest of approximately $8 million.

State Street will also pay $10 million each to Galvin and Coakley’s offices to settle related state allegations, according to the announcements.  With the approximately $350 million in earlier settlements of related private civil cases, State Street is set to pay about $663 million in total in the subprime mortgage matter. In its Thursday statement, the company said the money already set aside for its legal costs will cover the settlements.

Noting that the company has not formally admitted or denied the regulators’ allegations, State Street’s chairman and chief executive officer Ronald E. Logue said State Street is confident organizational actions it has already taken will help make certain there are no more related problems. The SEC said the State Street organizational actions included replacement of key senior personnel and portfolio managers, a review of its procedures, and a revision of risk controls.

“We value our reputation as a trusted fiduciary to institutions around the world and we recognize the critical importance of fulfilling our fiduciary obligations,” Logue said in the statement. “As such, we were determined to work with our regulators and with our customers to resolve their concerns around investments in certain of SSgA’s active fixed-income strategies in 2007. We remain committed to building on SSgA’s comprehensive organizational and infrastructure changes implemented over the past 24 months to ensure that our practices not only meet but exceed industry standards.”