SEC Informs State Street It Will Authorize Civil Enforcement Action For Violation Of Anti-Fraud Provisions
Many are pointing to State Street's just released 10-Q as the reason for increasing market weakness today. The new disclosure is that not only did the SEC file a Wells notice against State Street, but it will also be pursuing an enforcement action from STT, alleging violations of antifraud provisions of the federal securities laws. As the current amount available in SSgA's litigation reserve is a mere $193 million, the concern is that the newly disclosed enforcement action will reduce the reserve balance below zero. We will be following this development closely.
Several customers have filed litigation claims against us, some of which are putative class actions purportedly on behalf of customers, including customers which invested in certain of State Street Global Advisors’, or SSgA’s, active fixed-income strategies. These claims related to investment losses in one or more of SSgA’s strategies that included sub-prime investments. In 2007, we established a reserve of approximately $625 million to address legal exposure associated with the under-performance of certain active fixed-income strategies managed by SSgA and customer concerns as to whether the execution of these strategies was consistent with the customers’ investment intent. These strategies were adversely impacted by exposure to, and the lack of liquidity in, sub-prime mortgage markets that resulted from the disruption in the global securities markets during the second half of 2007. After aggregate payments of $432 million, the reserve totaled approximately $193 million at June 30, 2009.
[On June 25], 2009, the Staff of the SEC provided State Street Bank with a “Wells” notice related to the SEC’s ongoing investigation into disclosures and management by SSgA of its active fixed-income strategies during 2007 and prior periods. The SEC Staff has informed us that it is proceeding with an enforcement recommendation to the SEC Commissioners asking the SEC Commissioners to authorize a civil enforcement action against us alleging violations of antifraud provisions of the federal securities laws. We are in discussions with the SEC regarding this inquiry and with the Massachusetts Secretary of State, the Massachusetts Attorney General and other regulators regarding their related inquiries. If the SEC or other regulators were to pursue an enforcement action, they would likely seek monetary or other penalties or remedies. 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.