On Friday, October 28, 2011, Chief Administrative Law Judge Brenda Murray dismissed the administrative proceeding against John Flannery and James Hopkins of State Street Bank and Trust. The SEC had alleged that Messrs. Flannery and Hopkins "engaged in a course of business and made material misrepresentations and omissions that misled investors about the extent of subprime mortgage-backed securities held in certain unregistered funds under State Street’s management," which caused investors to continue to purchase or continue to hold their investments in these funds and lose hundreds of millions of dollars during the subprime market meltdown in mid-2007. In her 58-page opinion (available here), Judge Murray found that "that neither Flannery nor Hopkins was responsible for, or had ultimate authority over, the allegedly false and materially misleading documents at issue in this proceeding."

The SEC initially charged State Street in February 2010 with misleading investors and the Bank agreed to settle the charges by paying more than $300 million, which was to be distributed to those who lost their investments (and also settled private claims by paying approximately $350 million).

On September 30, 2010, the SEC commenced its action against Messrs. Flannery and Hopkins, claiming in a Press Release that the two "played an instrumental role in drafting a series of misleading communications to investors beginning in July 2007," while State Street provided certain investors with more complete information about the fund's subprime concentration and other problems with the fund. At the time, Robert Khuzami, Director of the SEC's Division of Enforcement said "[t]he SEC is committed to identifying and holding accountable those who violated the law and harmed investors through subprime investments."

After an eleven-day hearing, testimony from 19 witnesses (including five experts) and approximately 500 exhibits, Judge Murray ruled for the Respondents Flannery and Hopkins. Based on "the demeanor of both men during their two days of testimony and scrutiny of their answers compared with all other evidence in the record" and "the testimony of every witness who knew" them, Judge Murray found the Messrs. Flannery and Hopkins to be "credible witnesses."

The Commission charged Mr. Flannery and Mr. Hopkins with violating Sections 17(a)(1), (2), and (3) of the Securities Act and Section 10(b) of the Exchange Act (as well as Rule 10b-5). Judge Murray evaluated the conduct of the two men under the Supreme Court's recent decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2301-2302 (2011), focusing on who had "ultimate control" over the allegedly misleading statements. She concluded that they were not responsible for the misleading statements and because there were no materially false or misleading statements or omissions, there can also be no fraudulent "course of conduct" or "scheme liability."

As some in the media (here) have pointed out, "[t]he ruling comes at a time when the SEC has been criticized for settling cases against big financial firms without charging senior executives," citing Judge Rakoff's recent questions about the Citigroup settlement (discussed here). The Washington Post (also here) pointed out that the SEC "is reviewing the judge’s decision" and could appeal to the SEC Commissioners.