State Street Warns of Possible Legal Reserve Fund Depletion

August 11, 2009 ( - Still trying to defend itself against a spate of investor lawsuits over subprime-mortgage related holdings by its bond funds, State Street Corp. has revealed that its $625-million legal reserve fund may not be enough to cover its legal defense expenses.

In a Securities and Exchange Commission (SEC) regulatory filing, State Street said it has spent $432 million of its legal reserve, the Boston Globe reported. If federal and state regulators hit the investment firm with enforcement action over whether it sufficiently disclosed the bond fund’s exposure to the subprime mortgage crisis, the account could be depleted, the company said.  

The SEC appears to be focusing on whether State Street misled clients about some bond funds that were pitched to pension funds and other institutional investors as a conservative, safe investment, but wound up racking up large losses after placing riskier bets in mortgage-backed securities, home-equity loans, and other investments, according to the Globe.

“Depending upon the resolution of these governmental proceedings, the remainder of the reserve established in 2007 may not be sufficient to address ongoing litigation, as well as any such penalties or remedies,” the company said in its filing.

State Street has already made public that the SEC (see SEC to Consider SSgA Charges on Fixed Income Fund Activities ) is working on a case against it involving the mortgage investments and that Massachusetts Attorney General Martha Coakley and Secretary of State William F. Galvin (see MA Investigating State Street Wrongdoing in Pension Investments ) are both also probing its activities in the matter.

The company has been the target of a group of lawsuits alleging it did not properly disclose the subprime mortgage investments to pension funds and other investors who claim they were told the State Street bond funds would be conservatively run (see Now They’ve Done It… State Street Sued by Order of Nuns ).

The State Street SEC filing is available here .