State Street Corp., the third-largest custody bank, was fined $5 million by Massachusetts’ top securities regulator for failing to disclose the role of a hedge fund in structuring an investment vehicle that the fund was betting against.
State Street, acting as investment manager of Carina CDO Ltd., a collateralized debt obligation that invested in mortgage-backed securities, allowed Magnetar Capital LLC to influence the composition of the vehicle even though it knew that the Evanston, Illinois-based hedge fund was betting on the failure of some or all of the portfolio, according to a statement today from Secretary of the Commonwealth William F. Galvin. Carina subsequently defaulted.
“These deals, which packaged together toxic securities and sold them to other investors -- mostly institutions -- allowed the mortgage crisis to continue and caused further harm to the U.S. economy,” Galvin said in the statement.
Magnetar has been linked to 26 CDO transactions, according to the statement, and was at the center of another case, involving JPMorgan Chase & Co., in which regulators said it was improperly allowed to influence the formation of a CDO. Magnetar, betting housing prices would fall, stood to profit if assets defaulted. JPMorgan agreed in June to pay $153.6 million to end a Securities and Exchange Commission suit over the matter.
“In reaching this settlement, State Street neither admits nor denies the Massachusetts Securities Division’s findings or conclusions concerning information contained in the offering documents for the CDO,” Arlene Roberts, a spokeswoman for Boston-based State Street, said in an e-mailed statement.
The failure of the CDO, 16 months after it was created, resulted in about $450 million in losses to investors, according to Galvin.