State Street Settles for $300 Million

By LARRY LIGHT, JANE J. KIM and AMIR EFRATI

Money manager State Street Corp. agreed Thursday to pay back $313 million to investors misled about their exposure to subprime mortgages—one of the strongest sanctions yet for behavior during last decade's credit boom.



The Boston-based fund company has a reputation as a staid provider of investment advice. In charges filed by the Securities and Exchange Commission, the firm is accused of telling fund investors the assets were "diversified" when they were actually concentrated in money-losing subprime loans.



The firm also attracted the ire of the SEC and Massachusetts regulators for warning a group of elite clients about the fund problems, while keeping the information from other clients. State Street's own pension fund was one of those the firm advised to redeem, regulators said.



"We believe this settlement is in the best interests of our clients and our business," said Hannah Grove, a State Street spokeswoman.



The firm said it has replaced managers involved in the subprime case. As is typical in such settlements, it neither admitted nor denied the allegations.



The $313 million includes a fine of $50 million. State Street had already paid $350 million to investors through settlement of private lawsuits, bringing its total tally to roughly $663 million.



Despite large losses and many civil lawsuits, there has been relatively little established about legal culpability during the market boom of 2005 to 2007.



Last November, two former Bear Stearns hedge-fund managers were acquitted of making optimistic statements about two investments funds. An SEC civil lawsuit is pending.



More Settlements

MassMutual Financial Group's OppenheimerFunds Inc. has also reached settlements with states including Illinois, New Mexico and Oregon over large losses in a bond fund that held risky mortgage-backed securities in the states' "529" college-savings plans.



Over the past year, the SEC made civil-fraud allegations against numerous former executives of collapsed subprime lenders such as New Century Financial Corp. and American Home Mortgage Investment Corp. for allegedly misleading investors about the companies' performance.



The defendants have denied wrongdoing and the cases remain unresolved.Citigroup Inc. has been in negotiations with the SEC to settle an investigation into whether it misled investors by not making proper disclosures to investors about its mortgage assets, people familiar with the matter have said.



The commission and federal prosecutors are also investigating whether insurer American International Group Inc. misled investors about the value of derivatives contracts that were tied in part to subprime mortgages. AIG has said it is cooperating with investigators.



In a statement, SEC enforcement chief Robert Khuzami said that potential violations arising from the credit crisis remain a "high priority."



'Fiduciary Obligations'

Ronald E. Logue, State Street's chairman and chief executive officer, said in a statement: "We value our reputation as a trusted fiduciary to institutions around the world and we recognize the critical importance of fulfilling our fiduciary obligations.



"As such, we were determined to work with our regulators and with our customers to resolve their concerns around investments in certain of [State Street Global Advisors]'s active fixed-income strategies in 2007. We remain committed to building on [State Street Global Advisors ]'s comprehensive organizational and infrastructure changes implemented over the past 24 months to ensure that our practices not only meet but exceed industry standards."