State Street faces $927m bill

NEW YORK - State Street, one of the world's oldest and largest financial services companies, may have to pay more than US$625 million ($927 million) to deal with claims that it put its most risk-averse investors into toxic sub-prime mortgages.

The company said United States regulators were likely to launch a fraud prosecution, the latest attempt to root out the wrongdoing on Wall St that contributed to the credit crisis.

Staff at the Securities and Exchange Commission have recommended that the agency commissioners authorise a lawsuit "alleging violations of anti-fraud provisions of the federal securities laws", State Street said yesterday.

The company has been fighting allegations of wrongdoing since early in the crisis in 2007, when it started to become clear that trillions of dollars of mortgage-related bonds were not as safe as investors had been led to believe.

Two State Street funds which were meant to invest only in the safest securities plunged by US$80 million. They had begun investing in sub-prime mortgage-related bonds, whose value slumped as US borrowers began defaulting on their mortgage payments in unexpectedly high numbers. Some 28,000 individuals' pension funds were part-invested with the State Street funds.

Prudential Financial, the life insurer, which ran those pension funds, sued in 2007 in what was then one of the first legal actions between financial firms. Scores of Wall St players are now tussling in court over whether mortgage-related bonds and bond funds were mis-sold or mismanaged.

The credit-rating agencies, which certified many sub-prime-related bonds as AAA, the same level of creditworthiness as government bonds, are also being sued.

The intervention of the SEC raises the stakes for Wall St banks and bond managers. The agency declined to comment yesterday on whether it would sue State Street, and the company itself said it was too early to predict how much a settlement might cost.

- INDEPENDENT