SEC charges two former State Street employees
Federal regulators today charged two former employees at State Street Corp. with misleading investors about their exposure to subprime investments.
The Securities and Exchange Commission alleged that the employees, John P. Flannery and James D. Hopkins, marketed State Street's Limited Duration Bond Fund as an "enhanced cash" investment strategy -- a portfolio as safe as a money market fund.
But by 2007, the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives. However, State Street only told certain investors of the mounting risks in the fund amid the credit crisis.
The Boston financial services giant would ultimately settle charges with the SEC over the matter and pay out more than $663 million to investors and regulators, as previously reported.
In a statement, State Street said it "has resolved this matter both in terms of addressing client concerns as well as settling with the SEC and will not comment on the SEC's separate investigations into individuals who are no longer with the firm."
Flannery's attorney, Mark W. Pearlstein, said his client denied wrongdoing and would be vindicated at trial. He said the evidence in the case "will demonstrate that Mr. Flannery acted in complete good faith throughout his period of employment at State Street Global Advisors." He said the client letters in question were all approved by State Street lawyers.
"It is simply unfair and unjust that the SEC has chosen to bring claims against Mr. Flannery when he believed that the letters were accurate and he followed the advice of the company's lawyers,'' Pearlstein said.
Hopkins's lawyer, Jack Sylvia, said, “Mr. Hopkins is understandably disappointed that the SEC has chosen to commence this administrative action. He is justifiably proud of his distinguished 34-year career built on personal integrity and the highest ethical standards and fully expects to be exonerated once the true facts are presented.”