Story updated with a comment from Hopkins' attorney and stock price
shares were rising Thursday, despite formal
Securities and Exchange Commission
charges against two former employees as part of a larger -- now-settled -- suit against the trust bank regarding the subprime exposure in some of its funds.
Shortly before midday the SEC put out a release saying it was charging John P. Flannery and James D. Hopkins. Both were employed at the Boston-based company's subsidiary, State Street Bank and Trust, with misleading investors about their exposure to subprime investments.
According to Thursday's statement, the two employees marketed State Street's Limited Duration Bond Fund as an "enhanced cash" investment strategy that was supposedly an alternative to a money market fund for certain types of investors. Yet by 2007, the fund was "almost entirely invested in subprime residential mortgage-backed securities and derivatives," the SEC said.
Still the fund was continued to be described "less risky than a typical money market fund," the SEC said.
"Hopkins and Flannery misled State Street's investors about the risks and credit quality of a fund concentrated in subprime bonds and other subprime investments," Robert Khuzami, the director of the SEC's Division of Enforcement, said in the statement. "The SEC is committed to identifying and holding accountable those who violated the law and harmed investors through subprime investments."
State Street settled charges in February made to State Street Bank and Trust by agreeing to repay fund investors more than $300 million. The payment was in addition to nearly $350 million that State Street previously agreed to pay to investors in State Street funds to settle private claims, the SEC said.
Flannery was a chief investment officer and Hopkins was a product engineer at State Street, the SEC release said.
According to the SEC's order, State Street provided certain investors with more complete information about the fund's subprime concentration and other problems with the fund, which included clients of State Street's internal advisory groups.
The SEC alleges that State Street's internal advisory groups, one of which reported directly to Flannery, subsequently decided to recommend that all their clients (one of which was State Street's pension plan) redeem from the fund and the related funds.
At the direction of Flannery and State Street's Investment Committee, 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. This left the fund and its remaining investors with largely illiquid holdings.
State Street issued a statement to
in which it said the company "has resolved this matter in terms of addressing client concerns as well as settling with the SEC," according to an email. It would not comment on the SEC's separate investigations into individuals who are no longer with the firm, it said.
"We are very disappointed that the SEC has decided to file an administrative action against Mr. Flannery," said Mark Pearlstein, Flannery's attorney in a email statement. "With respect to each of the communications that issue in the administrative action, SSGA's experienced lawyers reviewed the content, provided edits and approved the final version. We look forward to Mr. Flannery being vindicated following the trial of this manner. "
Separately, Hopkins is "understandably disappointed that the SEC has chosen to commence this administrative action," according to a statement emailed to
by his attorney John F. Sylvia. "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."
State Street isn't the only bank that was slapped by the SEC over alleged fraud related to subprime mortgage investments.
On a slightly grander scale, the image resembles that of
. In July,
agreed to pay $550 million to settle civil fraud charges related to subprime mortgages that were brought against it by the SEC in mid-April. In its announcement of the settlement, the SEC said Goldman has acknowledged that its marketing materials for the synthetic CDO in question "contained incomplete information."
on the bank's total subprime mortgage and derivative exposure. The bank agreed to pay the fine without admitting or denying the claim.
The SEC also charged and fined two specific Citi executives, despite the fact that it was likely that
State Street shares were rising 1.7% to $37.96 on volume of about 3.6 million shares.
--Written by Laurie Kulikowski in New York.
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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.