The State Street Corporation’s recent settlement with the SEC provides a startling example of how large Wall Street firms abused their customers’ trust during the recent debacle in the financial markets. Simply stated, State Street hid important facts from most investors while secretly taking action to protect its own interests and those of a few select clients. Specifically, State Street told a few preferred investors in 2007 that one of its bond funds was almost entirely invested in subprime mortgage securities, allowing them to get out before the fund blew up. Simultaneously, other State Street customers were kept in the dark, costing them hundreds of millions of dollars.
State Street’s selective disclosure came to light on Thursday when it agreed to pay more than $310 million in penalties and restitution to settle accusations by the Securities and Exchange Commission and Massachusetts officials that it violated antifraud provisions of federal securities laws by misrepresenting and selling bond funds containing high-risk subprime investments as low-risk fixed-income products.
“State Street gave preferential treatment to some investors over others, leaving many investors ? including dozens of Massachusetts charities and retirement funds ? completely unaware of key facts about the funds,” the attorney general, Martha Coakley, said in a statement.
According to the article, which references a complaint filed by the S.E.C., State Street sold its Limited Duration Bond Fund as an alternative to a money market fund. By 2007, however, the fund was almost entirely invested in subprime securities. State Street misled many investors about the fund’s exposure to subprime investments, the S.E.C. said, but provided particular investors with more complete information.
Those favored investors included clients of State Street’s internal advisory groups, which advised some investors in the fund. The advisory groups recommended that their clients, including State Street’s own pension plan, redeem their investments. State Street sold the fund’s most liquid holdings to meet these redemptions, the S.E.C. said, leaving the remaining investors with largely illiquid holdings and huge losses.
The funds, which were managed by State Street Global Advisors, accounted for about $13 billion of State Street’s funds under management in 2007.
The settlement will be allocated among about 270 investors who lost money. It includes a $50 million fine and $8 million in forfeited advisory fees and interest. The payment is in addition to $350 million the bank will pay to settle private claims, the S.E.C. said. The bank will pay an additional $20 million to settle with Massachusetts authorities.
State Street has attempted to put a positive spin on its settlement of the fraud charges. “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,” Ronald E. Logue, State Street’s chairman and chief executive, said in a statement.
J. Boyd Page, an investors’ attorney with Page Perry, observed “This is simply an appalling abuse of trust. Unfortunately, this type of abuse has happened across Wall Street on repeated occasions over the past several years. People who don’t believe that are just kidding themselves.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions, and have aided clients who have been the victims of financial adviser abuse and scams. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.