State Street Corp. agreed to pay more than $300 million to settle charges by federal and Massachusetts state regulators that it misled investors about the risks its Limited Duration Bond Fund faced as a result of the subprime mortgage crisis in 2007.
State Street said in a news release it agreed to establish a $313 million “fair fund,” which combined with roughly $350 million in prior client settlements will bring total compensation to investors to $663 million. The company neither admitted nor denied the allegations.
According to an SEC news release, State Street favored certain investors, including clients of State Street's internal advisory groups, with fuller information about the fund's exposure to subprime mortgages, allowing those clients — including State Street's own pension funds, which had a total of $692 million as of Dec. 31, 2008, according to its 10-K — to get out early by redeeming the fund's most liquid holdings. Other investors, however, were given information that understated the fund's exposure to risky subprime mortgages, as well as its use of derivatives and leverage, the SEC argued.
Under the agreement, roughly 270 investors, including “charities, non-profit companies, religious institutions and retirement funds,” will receive roughly $310 million, according to a news release from Massachusetts Attorney General Martha Coakley, calling it the state's largest securities recovery to date. State Street also will pay a $10 million penalty to the state attorney general's office, and an additional $10 million penalty to the state secretary of state's office.
The Limited Duration Bond Fund, managed by SSgA, was launched in February 2002 as an actively managed fund seeking returns of one-half to three-quarters of a percentage point a year above LIBOR.