US court overturns SEC on State Street executives
Finds lack of evidence clients were mislead
A federal appeals court has overturned a 2015 Securities and Exchange Commission ruling against two former executives of Boston's State Street Global Advisors, saying the agency's decision was "not supported by substantial evidence."
The ruling by the First Circuit US Court of Appeals in Boston hands a defeat to the SEC's commissioners, who had overruled their agency's own administrative judge in the matter.
That judge in 2011 had cleared John P. Flannery, the former investment chief at State Street Global, and former vice president James D. Hopkins of SEC charges that they misled customers about the risks of a bond fund that lost money on investments in subprime mortgages.
Flannery's lawyers at McDermott Will & Emery called the Appeals Court decision "a resounding rebuke to Commission overreach, in a baseless case that never should have been brought."
The SEC first filed its case against Flannery, 57, and Hopkins in 2010. State Street Global's parent, State Street Corp., had to pay more than $663 million that year to settle charges that it misled customers about an "enhanced cash" strategy in a Limited Duration Bond Fund. The fund, which had $1.4 billion in customer assets, in August 2007 lost 37 percent of its value in three weeks.
The SEC's efforts to place the blame for misleading customers on Flannery and Hopkins failed before the agency's chief administrative law judge, who found that neither executive "was responsible for, or had ultimate authority over," the allegedly false and misleading documents sent to clients.
But the case didn't end there. In 2011, the SEC's Division of Enforcement appealed its loss to the five-member Securities & Exchange Commission, whose members are appointed by the president of the United States, with staggered terms. In a 3-2 decision last year, the commission reversed its own judge.
The commission suspended Hopkins and Flannery from the investment business for a year, and imposed fines of $6,500 on Flannery and $65,000 on Hopkins.
On Tuesday, however, circuit judge Sandra Lynch wrote that the appeals court did not find an Aug. 2, 2007, State Street letter to clients misleading. As a result, she said, Flannery could not be found liable. She also said the SEC had not proven Hopkins was reckless in a slide presentation to investors.
On the contrary, the court ruling reprised Flannery's concerns in 2006 about the declining state of the mortgage securities market and his asking management to weigh in on the subject. In June 2007, a product manager in a memo told Flannery that despite weakness, "we don't believe there is an imminent 'melt down' scenario."
Flannery, who wasn't normally responsible for letters to clients, wanted to tell investors in August about the volatile market, the ruling said. State Street Global's chief executive at the time asked why Flannery would want to "raise [his] head up" on the issue, according to the court record. But Flannery said he believed it was the "right thing to do.''
His Aug. 14 letter to clients, which the SEC said was misleading, contained edits by a company lawyer and was reviewed by top executives, as well as Flannery, according to the appeals court decision.
William Hunt, the CEO at the time, resigned and was replaced with a temporary chief executive in January 2008. Hunt could not be reached for comment.
"State Street and SSGA were not parties to the SEC's proceedings against Mr. Flannery and Mr. Hopkins. Nevertheless, we hope that they can now put this matter behind them and we wish them well,'' State Street spokeswoman Anne McNally said in a statement.
An SEC spokesman declined to comment Wednesday.
"It's been a disappointingly long ordeal. But at long last yesterday, John was exonerated,'' one of Flannery's lawyers, Mark Pearlstein, said in an interview.