Securities Law Blog

The Securities and Exchange Commission (SEC) charged State Street Bank and Trust Company on February 4, 2010 with misleading its investors in the Limited Duration Bond Fund. State Street created The Limited Duration Bond Fund (the “Fund”) in February 2002, and marketed it to investors as an alternative to a money market fund, claiming to have better sector diversification.

In 2006 and early 2007, State Street increased the investors’ exposure to subprime mortgages, while investors remained unaware of the extent to which their investments were tied to the money-losing loans. The Fund continued to be marketed to prospective investors without disclosing the extent of the fund’s concentration in subprime investments, according to the SEC complaint.

When the market meltdown began happening in July 2007, State Street provided selected investors with more complete information about the Fund, while allegedly keeping others in the dark. The informed investors are said to include clients of State Street’s internal advisory groups, who paid more for consulting services. According to the Complaint, these investors were informed by late July to exit the fund, while others were encouraged to stay and continue to invest. State Street began selling the fund’s most liquid holdings in order to meet the redemption demands of the more informed investors. The Fund was left with mostly illiquid holdings and cost investors millions of dollars.

Neither admitting or denying guilt, State Street agreed to settle the SEC’s charges by paying $313 million to allegedly misled investors who lost money during the meltdown. Making up the $313 million is a $50 million penalty, $8.3 million in disgorgement and prejudgment interest, and $255 million to investors. Prior to the SEC’s recent charges, State Street has already agreed to pay nearly $350 million to settle private lawsuits.