State Street hints at stiff fines

In a regulatory filing yesterday, the Boston financial giant said it could exhaust the reserves it set aside for legal settlements if regulators bring an enforcement action against the company.

So far, State Street has burned through $432 million of a $625 million legal reserve fund it created in 2007 to handle claims and fines related to investors’ losses, and State Street said it believes it could wind up spending more than the $625 million it originally put aside.

“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,’’ the company said in its filing.

State Street has disclosed that the US Securities and Exchange Commission is preparing an enforcement action against the company, and that it is also under investigation by Massachusetts Attorney General Martha Coakley and Secretary of State William F. Galvin, all of whom declined to comment. It also faces a raft of lawsuits from investors who lost money.

The SEC appears to be focusing on whether State Street misled clients about some bond funds that were pitched to pension funds and other institutional investors as a conservative, safe investment, but wound up racking up large losses after placing riskier bets in mortgage-backed securities, home-equity loans, and other investments.

The company’s warning yesterday is a sign of how much more aggressively regulators and investors are pursuing companies for fraud and other securities violations in the wake of the worst stock market and housing collapse since the Great Depression. Those actions could force the targeted companies to shell out millions of dollars in legal claims and settlements.

A well-known authority on Wall Street accounting said other companies are probably setting aside additional money to contend with legal claims.

“There is little precedent for the situation we find ourselves in, and companies appear to be preparing for the possibility of aggrieved investors suing them,’’ said Robert Willens, president of Robert Willens LLC in New York and adjunct professor at Columbia University.

And in the wake of the Bernard Madoff scandal, the Securities and Exchange Commission has dramatically increased its enforcement efforts. Last week the agency said it has begun 10 percent more investigations since late January, filed 30 percent more actions, and doubled the number of formal orders, which give it subpoena power, compared with the same period a year ago.

Just last week, Bank of America agreed to pay a $33 million penalty to settle charges that it misled investors in late 2008 about Merrill Lynch’s plans to pay $5.8 billion in bonuses to employees after Bank of America agreed to buy the investment bank. That settlement awaits a judge’s approval.

“Given the meltdown in the financial system, it makes sense that the SEC and other regulatory bodies are taking a closer look at investment companies to see if perhaps there were red flags that were missed,’’ said Sara Shanahan, a partner with Boston law firm Sherin and Lodgen LLP who has handled securities fraud cases. “You would think they would be under some political pressure to see if there is any recovery to be had from industry.’’

For now, State Street’s potential additional exposure is unknown. And under accounting rules, companies are not supposed to set aside reserve funds until they have a good handle on how much money they will have to pay. Even State Street was cagey about how much more money it might have to set aside.

“We’re not going to speculate,’’ said State Street spokeswoman Carolyn Cichon.

One banking analyst who follows State Street, Nancy Bush, said the company’s disclosure about possible additional reserves was a “boilerplate’’ warning to investors and does not raise new red flags.

State Street shares slid 2 percent yesterday on the New York Stock Exchange after the company warned that its legal reserve fund might be insufficient. The bank’s shares closed down $1.29 at $52.57.

Todd Wallack can be reached at twallack@globe.com.