State Street Corporation, an Asset Manager, will pay $70 million to investors and employees who claimed the company mischaracterized its mortgage-backed securities investments as “high quality” in late 2008, months before their value declined by $10 billion. The company will pay $60 million to settle the securities action and $10 million to settle two ERISA suits. It was alleged in the three class actions that State Street perpetrated multibillion-dollar frauds by overstating revenues from foreign exchange dealings and by telling investors its MBS buys were solid before they went in the tank. State street says on its web page that it partners with institutional investors to provide comprehensive financial services, including, among other things, investment management.
The securities lawsuit accused State Street and its current and former executives of violating securities laws and deceiving investors in 2008 when it assured them that securities contained in its investment portfolio – which were collateralized in part by risky mortgage-backed securities – were of high quality. The company’s stock dropped on Oct. 20, 2009, a day when two big pieces of State Street news came out. California’s attorney general on that day announced a lawsuit against State Street and, according to the settlement, the company also released a negative earnings report.
While the Plaintiffs argued the stock drop occurred because of the lawsuit news, the Defendants claimed it was because of the earnings report. Proving either version would have been difficult, according to the settlement memo. In August 2011, State Street lost a bid to toss the allegations when a judge denied four motions to dismiss various claims against the Boston-based bank, calling them “replete with detailed and well-pled facts.”
U.S. District Judge Nancy Gertner’s 2011 opinion referenced suit by the California Attorney General, which accused State Street of cheating Golden State investors out of $200 million in forex overcharges, causing the bank’s stock to plummet by more than 8 percent on Oct. 20.
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