US - State Street said its US$625m legal reserve may run dry after the Securities and Exchange Commission told the firm it planned to recommend enforcement action against them for violating securities laws.
In a regulatory filing yesterday, State Street said it only had $193m of the original reserve left as of June 30.
The firm set up the reserve in 2007 when it came under fire from investors for allegedly misrepresenting the amount of risk in some of its bond funds - particularly the Limited Duration Bond Fund, run by State Street Global Advisors.
Yesterday's filing said: "If the SEC or other regulators were to pursue an enforcement action, they would likely seek monetary or other penalties or remedies.
"Depending upon the resolution of these governmental proceedings, the remainder of the reserve established in 2007 may not be sufficient to address ongoing litigation, as well as any such penalties or remedies."
In June, the SEC issued State Street with a "Wells" notice -a warning that the Commission could file charges against a firm for violations of securities laws.
SEC staff has since told State Street it is recommending SEC Commissioners "authorize a civil enforcement action against us alleging violations of antifraud provisions of the federal securities laws".
The firm said it was also evaluating claims regarding the firm's cash collateral pools and claims from investors in SSgA funds that used Lehman Brothers International Europe as a prime broker.
State Street is also evaluating claims and counterclaims regarding the bankruptcy estates of Lehman Brothers affiliates, the filing said.
State Street said it is cooperating with the SEC, Massachusetts Secretary of State, the Massachusetts Attorney General and other regulators in similar enquiries.
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