Articles Posted in State Street Bank and Trust Company

The Securities and Exchange Commission is considering whether to file civil charges against State Street Corp. over possible securities violations related to subprime mortgages. The Boston-based firm is the largest asset manager for institutions in the world.

In its regulatory filing that it submitted on Monday, State Street noted that the SEC had sent State Street Bank and Trust Co. a “Wells” notice related to a probe into disclosures and management of the bank’s fixed-income investments before 2008. The asset manager is cooperating with the SEC, as well as with Massachusetts’s attorney general. Massachusetts’s lead securities regulator, Secretary of the Commonwealth William F. Galvin, is looking at allegations that State Street misled pension funds over how much risk was involved in the investments.

Just before the housing market fell in 2007, State Street’s fixed-income investment unit began to increase its investments in bonds and securities related to subprime mortgages. Customers with poor credit records were even given loans. When the market collapsed and defaults on mortgages went sky high, the investments’ values dropped significantly, leading to investor losses.

Massachusetts plumbing and air conditioning supply company F.W. Webb Company is suing State Street Bank and Trust Company, State Street Global Advisors (SSgA), and CitiStreet. F.W. Webb is accusing the defendants of misrepresenting a bond fund as a low risk 401k-investment option, when in fact, the SSgA Yield Plus Fund was invested in mortgage-based securities.

FW Webb says the investment option had been represented on more than one occasion as being similar to a money market portfolio but with better returns. FW Webb alleges that beginning in 1996, State Street changed its investment strategy for the Yield Plus account so that there was an emphasis on lower-quality securities that were accompanied by greater risks.

The lawsuit contends that the Yield Plus Fund create a level of risk that was inappropriate and not in line with the stated investment goals of the Massachusetts company’s 401K Plan or the objectives of a traditional money market fund. The complaint contends that the fund dropped dramatically in mid-2007 because of its overexposure to low-quality assets and securities that were high in risk.

CitiStreet, which has provided FW Webb with investment management and recordkeeping and administrative functions since 2000, is also a defendant in the suit. FW Webb say that any instability related to the Yield Plus Fund was never an issue that CitiStreet or State Street brought to its attention, which gave the plumbing and air conditioning supply company no reason to question whether the fund should be included in its 401K Plan.

The lawsuit also noted that the decision to move the Yield Plus Fund into mortgage-backed investments during 2005-2007 occurred during a time when defaults of the subprime mortgages had skyrocketed and subprime lenders were dealing with insolvency. The SSgA Yield Plus Fund’s Board of Directors decided to liquidate the fund as of May 31, 2008.

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