The Securities and Exchange Commission (SEC) on Thursday charge two State Street Bank and Trust Co. employees for allegedly misleading investors about their exposure to subprime investments.

The two are John P. Flannery, a chief investment officer who no longer works at State Street, and James D. Hopkins, a product engineer who is currently the firm's head of product engineering for North America.

At issue is the State Street Limited Duration Bond Fund, an enhanced cash fund that was marketed as an alternative to money market funds but that was almost entirely invested in subprime mortgage-backed securities and derivatives, the SEC said.

In February, State Street settled with the SEC for $313 million to be repaid to investors. Privately, State Street has already paid $350 million to investors through lawsuits.

The SEC said State Street provided more complete information on the fund¹s subprime exposure and "other problems" with the fund to certain investors, including clients of State Street's internal advisory groups such as its own pension plan, but not to all.

The SEC said Flannery directed the fund to sell its more liquid investments to meet the redemption orders of those better-informed clients. "This left the fund and its remaining investors with largely illiquid holdings," the SEC said.


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