US - The Securities and Exchange Commission has charged two former State Street employees with misleading investors about their exposure to subprime investments.
The SEC's Division of Enforcement claims chief investment officer John Flannery and product engineer James Hopkins, who later became State Street's head of product engineering for North America, marketed the asset manager's Limited Duration Bond Fund as an "enhanced cash" investment strategy that was an alternative to a money market fund for certain types of investors.
By 2007, however, the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives. Yet despite this exposure to subprime securities, the fund continued to be described as less risky than a typical money market fund and the extent of its concentration in subprime investments was not disclosed to investors, the SEC said.
The commission charged Boston-based State Street in a related case earlier this year. The firm agreed to settle the charges by repaying fund investors more than $300m. (Global Pensions: 05 February 2010)
"Hopkins and Flannery misled State Street's investors about the risks and credit quality of a fund concentrated in subprime bonds and other subprime investments," said Robert Khuzami, director of the SEC's Division of Enforcement. "The SEC is committed to identifying and holding accountable those who violated the law and harmed investors through subprime investments."
According to the SEC's order instituting administrative proceedings against Hopkins and Flannery, they played an instrumental role in drafting a series of misleading communications to investors beginning in July 2007.
According to the SEC's order, the misleading communications to investors related to the effect of the turmoil in the subprime market on the Limited Duration Bond Fund and other State Street funds that invested in it. State Street provided certain investors with more complete information about the fund's subprime concentration and other problems with the fund.
These better-notified investors included clients of State Street's internal advisory groups, which provided advisory services to some of the investors in the fund and the related funds, said the SEC.
Its Division of Enforcement alleges that State Street's internal advisory groups, one of which reported directly to Flannery, subsequently decided to recommend that all their clients redeem from the fund and the related funds. The pension plan of State Street's publicly-traded parent company (State Street Corporation) was one of those clients.
At the direction of Flannery and State Street's Investment Committee, State Street sold the fund's most liquid holdings and used the cash it received from these sales to meet the redemption demands of better informed investors. This left the fund and its remaining investors with largely illiquid holdings.
In the settlement with the firm announced jointly by the SEC and the offices of Massachusetts Secretary of State William F. Galvin and Massachusetts Attorney General Martha Coakley, State Street agreed to pay more than $300m to investors who lost money during the subprime market meltdown in 2007.
Here are key takeaways from our 2019 Asset Allocation Outlook on how we are positioning asset allocation portfolios in light of our outlook for the global economy and markets.
This week's top stories included a Freedom of Information request revealing more than 100,000 savers could face six-figure tax bills as a result of GMP equalisation.
The Pearson Pension Plan has entered into a £500m pensioner buy-in with Legal & General (L&G) in the insurer's first deal of 2019.