SEC tells State Street it could face civil charges
NEW YORK — State Street Corp. on Monday disclosed in a regulatory filing that the Securities and Exchange Commission could bring civil charges against its main subsidiary for possible securities violations tied to past investments in subprime mortgages.
State Street Bank and Trust Co. received a “Wells” notice from the SEC on Thursday tied to the ongoing investigation by the SEC into disclosures and management of the bank’s fixed-income investments during 2007 and earlier periods, according to Monday’s regulatory filing.
In 2007, ahead of the collapse of the housing market, State Street’s fixed-income investment unit increasingly invested in securities and bonds backed by subprime mortgages — loans given to customers with poor credit history. As the housing market unraveled in late 2007 and defaults on mortgages began to skyrocket, the value of those investments plummeted leading to losses in the investment funds.
The losses led some investors to file lawsuits, questioning whether State Street’s investments fit strategies consistent with those of more traditional fixed-income funds. During the fourth quarter of 2007, State Street established a reserve fund of $625 million to settle claims.
About two-thirds of the fund has been spent settling claims since then. As of March 31, there was about $207 million remaining in the reserve fund.
Fox-Pitt Kelton analyst Andrew Marquardt said the notice of a potential civil action against State Street should have little impact on the company, aside from a potential regulatory fine. In a research note, Marquardt said any fine would likely be manageable and take several quarters before being resolved.
SunTrust Robinson Humphrey analyst John Stilmar said aside from the potential cost of a fine, another concern could be how the investigation affects generating new business. However, Stilmar said the bank’s strengths far outweigh any risk of business being lost by the potential civil action.
Stilmar maintained a “buy” rating on the company’s stock. Fox-Pitt Kelton’s Marquardt rates it as “outperform.”
The Wells notice indicates the possibility of an enforcement action and allows for the trust bank to provide its perspective on the investigation before any formal proceedings begin.
Boston-based State Street provides accounting, brokerage and other services to mutual funds, retirement plans, insurance companies and other customers. The company said it has been cooperating with the SEC, the Massachusetts secretary of state and the Massachusetts attorney general.
Shares of State Street advanced 18 cents to $48.50 in Monday trading.
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