State Street Corp. (STT) agreed on Thursday to pay investors over $300 million to settle allegations by federal and state regulators over misleading investors about its investments in subprime mortgages at the beginning of the credit crisis.
 
Under the terms of the settlement, State Street will pay about 270 investors. State Street will also pay a $10 million fine to both Massachusetts’ Attorney General’s office and the Secretary of State’s office.
 
According to the Securities and Exchange Commission (SEC), the funds for investment − called the Limited Duration Bond Fund − was set up in 2002 as an enhanced cash fund. The fund was promoted to investors as an alternative to a traditional money market fund. However, by 2007, the entire fund was invested in subprime residential mortgage-backed securities and derivatives, but State Street failed to inform investors about the fund’s exposure to subprime securities.
 
State Street said that the previous litigation reserves were sufficient to cover the settlement costs. However, since the allegations were floated, many of the executives have resigned.
 
Incorporated in 1832 and headquartered in Boston, Massachusetts, State Street Corporation is a financial holding company. The company provides a range of products and services to institutional investors worldwide through its subsidiaries.
 
State Street remains well-positioned with respect to its core business, primarily servicing, trading and securities finance, due to its significant leverage to global scale and full range of innovative products and services. Besides, the company has been experiencing decent growth in interest revenue. All these factors have contributed to State Street’s profitability over the last couple of years despite an extraordinary turmoil in the global economy. On the basis of all these strengths, we believe the company will experience a significant earnings boost with the gradual recovery of the overall economic condition.
 
Though we are concerned about the company’s risky investment portfolio exposure, we believe that prudent cost control and strong regulatory capital ratios along with well-off core servicing and investment management franchises will help it offset the volatility caused by the global economic turmoil, thereby providing the buoyancy to grow in the medium to longer term.
 
On Thursday, the shares of State Street were down by about 3.0%, closing at $43.07 on the New York Stock Exchange.
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