The SEC may seek sanctions against two former executives at State Street Global Advisors, including John Flannery, the firm’s chief investment officer of the Americas until November 2007, accused of misleading investors in a bond fund at the center of a $313 million settlement between parent State Street and the agency earlier this year.
Mr. Flannery and James Hopkins, a former product engineer, “played an instrumental role” in letters touting as safe a fund that was almost entirely invested in securities and derivatives backed by the subprime mortgages, the SEC said.
SSgA, the second-largest money manager for institutions, resolved related claims in February without admitting or denying the allegations.
An SEC administrative judge will determine whether to impose penalties or other sanctions against Messrs. Flannery and Hopkins, the agency said.
Mark Pearlstein, Mr. Flannery’s attorney at McDermott Will & Emery, said “it is unfair and unjust that the SEC has chosen to bring claims against Mr. Flannery when he believed that the letters were accurate and he followed the advice” of State Street’s lawyers. “He fully cooperated with the SEC’s investigation, and the evidence demonstrates that Mr. Flannery acted in complete good faith,” Mr. Pearlstein said.
Mr. Hopkins is “disappointed” by the SEC’s allegations and “fully expects to be exonerated once the true facts are presented,” John Sylvia, his attorney at Mintz Levin Cohn Ferris Glovsky & Popeo PC, said in a statement.
The SEC’s claims were related to SSgA’s Limited Duration Bond Fund, which was marketed as an alternative to a money market fund. The firm failed to disclose to some investors the extent of the fund’s investments in bonds backed by subprime home loans, the SEC said.
As State Street told investors in 2007 that the fund had a relatively small exposure to subprime, Mr. Hopkins was privately acknowledging the investment was risky, the SEC said.
State Street gave more complete information beginning in July 2007 to clients who paid for additional consulting services, the SEC said in its administrative order. Those clients were advised by the firm to exit the fund.
State Street subsequently sold the most liquid holdings to meet redemptions from better-informed investors, “leaving the fund and its remaining investors with large illiquid holdings,” according to the SEC.
“State Street has resolved this matter both in terms of addressing client concern as well as settling with the SEC,” said spokeswoman Arlene Roberts, declining to comment on the case against Messrs. Flannery and Hopkins.
Reporter Douglas Appell contributed to this story.