Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, September 30, 2010

Former State Street Employees Settle Charges They Misled Investors about Subprime Exposure

The SEC today charged a pair of former employees at Boston-based State Street Bank and Trust Company with misleading investors about their exposure to subprime investments.  The SEC's Division of Enforcement alleges that John P. Flannery and James D. Hopkins marketed State Street's Limited Duration Bond Fund as an "enhanced cash" investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives. Yet despite this exposure to subprime securities, the fund continued to be described as less risky than a typical money market fund and the extent of its concentration in subprime investments was not disclosed to investors.

According to the SEC, Hopkins and Flannery played an instrumental role in drafting a series of misleading communications to investors beginning in July 2007. Flannery was a chief investment officer. Hopkins was a product engineer at the time, and later State Street's head of product engineering for North America.

In the settlement with the firm announced jointly by the SEC and the offices of Massachusetts Secretary of State William F. Galvin and Massachusetts Attorney General Martha Coakley, State Street agreed to pay more than $300 million to investors who lost money during the subprime market meltdown in 2007. State Street distributed those funds to investors in February and March. State Street additionally paid nearly $350 million to investors to settle private lawsuits.

The SEC charged State Street in a related case earlier this year. The firm agreed to settle the charges by repaying fund investors more than $300 million.

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