On February 4, 2010, the SEC charged State Street Bank and Trust Company with misleading its investors about their exposure to subprime investments while selectively disclosing more complete information to specific investors. According to the SEC’s complaint, State Street established its Limited Duration Bond Fund in 2002 and marketed it as an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors.
According to the complaint, the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives that magnified its exposure to subprime securities by 2007. However, State Street continued to describe the fund to prospective and current investors as having better sector diversification than a typical money market fund, and failed to disclose the extent of the fund’s concentration in subprime investments.
According to the SEC’s complaint and order, State Street sent investors a series of misleading communications beginning in July 2007 concerning the effect of the turmoil in the subprime market on the fund and other State Street funds that invested in it. At the same time, however, State Street provided particular investors (including clients of State Street’s internal advisory groups) with more complete information about the fund’s subprime concentration and other problems with the fund. The SEC alleged that, based on this more complete information, State Street’s internal advisory groups subsequently decided to recommend that all of their clients redeem their investments from the fund and the related funds. The SEC also alleged that 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, leaving the fund and its remaining investors with largely illiquid holdings.
Under the terms of the settlement, State Street agreed to pay a $50 million penalty, more than $8.3 million in disgorgement and prejudgment interest and more than $255 million in additional payments to compensate investors. Combined with the nearly $350 million that State Street has already paid or agreed to pay some investors through settlements of private lawsuits, the total compensation to harmed State Street investors is approximately $663 million.