U.S. District Judge Richard Holwell of the U.S. District Court for the Southern District of New York flatly rejected State Street’s request to wait until it resolves a parallel investigation by the U.S. Securities and Exchange Commission (SEC).

Securities regulators served State Street with a Wells notice in the SEC matter as part of a procedure to formally notify a potential enforcement target of its status and give it a chance to respond to allegations being made against it (see “SEC to Consider SSgA Charges on Fixed-Income Fund Activities”).   

State Street’s contention, rejected by Holwell, who went on to grant the sought-after preliminary approval, was that members of the class represented in the 2007 lawsuit being settled in Holwell’s court couldn’t be certain the $90-million payment involved was the best the civil suit plaintiffs would be able to do to recoup more of what they said was a $150-million loss from their State Street bond fund investments.

Impact on Potential SEC Settlement

The plaintiffs alleged State Street represented that the bond funds were comparatively low risk, but went on to take sizable positions in risky subprime-mortgage related securities without adequately disclosing that strategy (see “Minn. Firm Slaps State Street with Subprime Suit”).

"The ERISA settlement is, as plaintiffs point out, a bird in the hand," Holwell wrote in an order. "Upon preliminary approval, the settlement sum will be deposited into an escrow account and begin accruing interest. Pending only final fairness approval, the class will receive the net value of its $89-million settlement."

Although he said State Street should be applauded for its apparent concern for the plaintiffs, Holwell insisted there was no way to know that the civil suit settlement would hurt the plaintiffs' recovery through the SEC enforcement action. Settlements of SEC enforcement actions typically require targets to deposit payments in a special fund to reimburse victims.

"Through cryptic and selective reference to its discussions with the SEC, defendant suggests that a future SEC settlement might include a ‘fair fund’ that would provide greater recovery to the prospective class members than would this proposed settlement," Holwell wrote. "The problem with this argument is that, by all indications, the ERISA settlement would not jeopardize any further recovery via a fair fund. Indeed, defendant does not seriously contend that an SEC fair fund would exclude those entities that choose to participate in this settlement."

The latest court ruling is available here.