Attorney General Martha Coakley Announces $300 Million Recovery for Fund Investors From State Street Bank Regarding Subprime Investment Losses
Joint investigation with SEC recovers moneys for investors in dozens of funds that invested in subprime market; Attorney General recovers $10 Million for Commonwealth
"State Street gave preferential treatment to some investors over others, leaving many investors-including dozens of Massachusetts charities and retirement funds--completely unaware of key facts about the funds," said Attorney General Martha Coakley. "With this settlement, we are providing compensation to investors, applying a statutory penalty to State Street, and making sure that State Street reworks its internal practices to prevent these types of problems in the future."
Under the terms of the settlement, approximately 270 investors (approximately 50 of which are in Massachusetts), including charities, non-profit companies, religious institutions and retirement funds, will receive approximately $310 million. Additionally, State Street is required to make a $78 million payment to investors through this settlement if it fails to resolve claims currently pending in a separate class action case in federal court in New York regarding certain ERISA investment claims. State Street will also pay a $10 million penalty under the settlement with the Attorney General's Office. In addition, the company has agreed to undergo a procedures review by an Independent Compliance Consultant ("ICC") and will change its internal practices in accordance with ICC recommendations in order to avoid similar problems in the future.
The settlement, which is subject to approval by the Suffolk Superior Court, stems from a lengthy investigation in which the Attorney General's Office partnered with the Boston regional office of the federal Securities and Exchange Commission (SEC), and the Securities Division on the Massachusetts Secretary of State's Office.
"We are pleased with the results of our collaboration with the SEC and the Securities Division. This joint investigation by our office and federal securities enforcement authorities allowed us to pool resources and expertise, and enabled both agencies to address State Street's conduct more effectively," said Attorney General Martha Coakley. "We look forward to future collaborations with the regional SEC enforcement team."
The complaint, also filed today in Suffolk Superior Court, alleges that during the subprime market crash in 2007, State Street's investment management arm contacted investors in the funds and provided them with information on their investments, but failed to disclose material information necessary for investors to decide whether to remain invested. The complaint states that investors in approximately 40 funds were affected, including State Street's Limited Duration Bond Fund ("LDBF"), Bond Market Common Trust Fund, Bond Market Non-Lending Fund, Intermediate Bond Common Trust Fund, and Short Term Bond Common Trust Fund. The bond funds were allegedly described to investors as taking on "moderate" active risk, or seeking attractive returns while "controlling risk" or "preserving capital." In an attempt to keep returns high, State Street invested heavily in sub-prime related investments, including derivatives tied to the subprime market.
State Street sent letters to investors which allegedly failed to disclose material information about the bond funds. The first letter to investors, dated July 26 th, 2007 did not disclose the full extent of the funds' subprime exposure or the fact that the funds' losses were almost exclusively attributable to subprime holdings. The letter, which stated that events in the subprime market were "more driven by liquidity and leverage issues than long term fundamentals" also failed to disclose that a major advisory group within State Street had already decided to recommend to their advisory clients that they liquidate their fund holdings. The letter also failed to disclose that State Street was selling the most liquid holdings of a key fund, the LDBF, and would be using the cash it received from these sales to meet the redemption demands of internal advisory group clients and others leaving the fund, thus leaving remaining investors with largely illiquid holdings. These omissions allegedly caused the remaining investors to maintain their holdings in an increasingly volatile market environment.
Other letters from State Street allegedly followed in succeeding months, none of which disclosed information about the advisory group liquidations. On August 14th, another letter was sent to investors which opined that State Street's investment management arm believed that "many judicious investors" would hold their positions in the subprime market. The letter failed to disclose how State Street's internal advisory groups had recommended that their clients abandon the funds, including State Street's own retirement fund, that had now liquidated its holdings.
Many investors, who stayed in the funds after receiving State Street's letters, suffered significant losses as the subprime market continued to decline and the funds became ever more illiquid.
The Attorney General brought this action under the state Consumer Protection Act, which empowers the Attorney General to bring actions when investors have been misled, and under the State False Claims Act. The False Claims Act authorizes the Attorney General to recover damages, civil penalties and costs when a Commonwealth buyer suffers harm as the result of misleading statements related to a government contract for goods or services.
In addition to the SEC and the Attorney General, the Secretary of the Commonwealth is also entering a settlement with State Street, in order to resolve state administrative claims.
Over the past three years, Attorney General Coakley's office has recovered tens of millions of dollars for Massachusetts investors and taxpayers from companies that engaged in subprime lending practices and investments related to subprime lending. In June 2009, Coakley's office reached a $10 million settlement with Fremont General in which Fremont addressed claims that it wrote 15,000 Massachusetts mortgages that were considered "doomed to foreclosure." The agreement also secured an injunction letting state officials review any of the firm's 2,200 remaining Massachusetts mortgages before foreclosure proceedings could begin. In May 2009, Coakley's office reached a first-in-the-nation $60 million settlement with Goldman Sachs in which the company agreed to provide loan restructuring for over 700 Massachusetts homeowners. During 2008, the Attorney General's Office recovered more than $77 million for Massachusetts cities, towns, and other government entities under the state's civil False Claims Act in connection with misleading and unlawful investment marketing to local governments. These recoveries included settlements with investment banks Merrill Lynch, UBS, Morgan Stanley & Company, and Citibank.
The case is being handled by Assistant Attorneys General Amita Singh and Glenn Kaplan of Attorney General Coakley's Insurance & Financial Services Division. Assistant Attorney General Tori Kim and Legal Analyst Greg Dekermenjian, both formerly of the Insurance & Financial Services Division, and Legal Analyst Melissa Swindel, also worked on the investigation.