A legal reserve created by State Street Corp., Boston, to deal with law suits filed against the company over subprime mortgage investments by one of its subsidiaries may not be large enough to cover what the company might eventually have to pay out.
In 2007, State Street established a $625 million reserve to cover legal proceedings, of which $432 million has been paid out, leaving $193 million available.
According to State Street's second quarter 10-Q filing, in June the Securities and Exchange Commission (SEC) sent a "Wells" notice regarding an investigation into State Street Global Advisors disclosures and management of its active fixed-income strategies during 2007 and prior periods.
"The SEC Staff has informed us that it is proceeding with an enforcement recommendation to the SEC Commissioners asking the SEC Commissioners to authorize a civil enforcement action against us alleging violations of antifraud provisions of the federal securities laws. We are in discussions with the SEC regarding this inquiry and with the Massachusetts Secretary of State, the Massachusetts Attorney General and other regulators regarding their related inquiries. If the SEC or other regulators were to pursue an enforcement action, they would likely seek monetary or other penalties or remedies. Depending upon the resolution of these governmental proceedings, the remainder of the reserve established in 2007 may not be sufficient to address ongoing litigation, as well as any such penalties or remedies," the 10-Q filing said.