Facing Legal Pressure, State Street Ups Defense Reserves

(November 12, 2009) – State Street, under assault for allegedly overcharging some foreign exchange clients and exposing others to sub-prime mortgages, has added millions to its legal defense fund.

The fund, established in 2007 to defend against claims that the bank had exposed clients to subprime mortgages through its fixed-income investment strategies, has received $250 million. The fund started with $618 million, but had since been drawn down to just $193 million. The funds will be used partially to settle a $90 million claim by fixed-income participants who were unwittingly exposed to the illiquidity of subprime markets. The excess funds will be used for any potential civil suit brought by regulators, according to Reuters.

State Street is also on the defensive about potential overcharges for foreign exchange trades for two California pension giants. Recent reports suggest that the California Public Employees’ Retirement System (CalPERS) knew of such overcharges as early as 2003. The Wall Street Journal, refusing to cite sources, has reported that consultants advised the fund that they were overpaying for such services.

State Street is denying all charges.