Securities Law Blog

Two State Street employees have been charged by the Securities and Exchange Commission (SEC) for their alleged role in misleading investors about their exposure to subprime investments. State Street Bank and Trust Company settled SEC charges earlier this year in a related case by agreeing to pay more than $300 million to investors who lost money. As part of the settlement agreement State Street also agreed to provide information to enable the SEC to assess the potential liability of individuals involved with State Street’s investor communications for the Limited Duration Bond Fund.

According to the SEC, “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.” Despite the fund being almost entirely invested in subprime residential mortgage-backed securities and derivatives by 2007, the pair continued to draft misleading communications to investors. Flannery and Hopkins allegedly described the fund as less risky than a typical money market fund and did not disclose to investors the extent of its concentration in subprime investments.

The SEC’s complaint against State Street alleged that clients of the firm’s internal advisory groups were better notified with more complete information about the fund’s concentration in subprime investments. One of State Street’s internal advisory groups, which directly reported to Flannery, purportedly decided to recommend that all their clients redeem shares in the fund (and related funds). As a result, the fund’s most liquid holdings were sold to meet the redemption demands of the better informed investors, leaving mostly illiquid holdings for the fund’s remaining investors.

The SEC is said to have begun administrative proceedings against Hopkins and Flannery for their role in harming investors through subprime investments.