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State Street Gave Some Investors Preferential Info About Limited Duration Bond

State Street Corporation gave some “preferred” investors key information about its Limited Duration Bond Fund back in 2007, allowing them to jump ship and subsequently avoid millions of dollars in losses. As it turns out, the Limited Duration Bond Fund was almost entirely invested in mortgage-related securities. Investors who were not privy to State Street’s pre-warnings paid the price.

As reported Feb. 4 by the New York Times, State Street’s selective disclosure became public after agreed to pay more than $310 million in penalties and restitution to settle accusations by the Securities and Exchange Commission (SEC) and Massachusetts officials that it misled investors about the risks associated with the Limited Duration Bond Fund and other funds that invested in it.

According to a complaint filed by the SEC, State Street created the Limited Duration Bond Fund in 2002 and marketed it as an alternative to a money-market fund. Five years later, however, the fund was almost entirely invested in mortgage securities. State Street not only misled many investors about the fund’s exposure, but also provided certain investors with more complete information regarding the fund’s investing strategies, the SEC says.

“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 Massachusetts Attorney General Martha Coakley in a statement.

Investors who received more accurate information from State Street included clients of State Street’s internal advisory groups, which advised some investors in the fund. The advisory groups recommended that their clients, including State Street’s own pension plan, redeem their investments. State Street sold the most liquid holdings to meet these redemptions, according to the SEC. As for the remaining investors, they were left with largely illiquid holdings.

The funds, which were managed by State Street Global Advisors, accounted for about $13 billion of State Street’s funds under management in 2007.

State Street’s settlement will be allocated among about 270 investors who lost money. It includes a $50 million fine and $8 million in forfeited advisory fees and interest. The payment is in addition to $350 million that State Street will pay to settle private claims. The bank also will pay an additional $20 million to settle with Massachusetts authorities.

State Street does not admit or deny the allegations.

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