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.
Already, a number of investors have filed securities fraud lawsuits against State Street for allegedly investing in home mortgages that were too high risk. In October 2007, Prudential Financial Inc. sued State Street for $80 million on behalf of 200 retirement plans. The financial figure they are seeking is how much was lost in two bond funds. Some 28,000 retirement accounts were affected. In its complaint, filed under the Employee Retirement Income Security Act, the life insurer accused State Street of changing the funds’ investment strategies and making “highly leveraged investments in mortgage-related” assets without disclosing these investments.
In the 4th quarter of 2007, State Street put aside at least $618 million to settle claims related to subprime home loan-related losses. As of the end of March, the asset manager had $207 million left in its reserve fund.
Related Web Resources:
State Street Says SEC May Sue Over Bond Investments, Bloomberg.com, June 29, 2009
SEC tells State Street it could face civil charges, AP/Google, June 30, 2009