| WASHINGTON, July 25
WASHINGTON, July 25 U.S. government lawyers
asked federal regulators on Friday to overturn a judge's ruling
dismissing their case against two former State Street Corp
executives accused of misleading investors in a fund
exposed to subprime mortgages.
In oral arguments, the Securities and Exchange Commission's
enforcement division told SEC commissioners it had convincing
evidence the two men misled investors.
"The federal securities laws do not permit individuals to
lie about what is in a portfolio," SEC enforcement attorney
Kathleen Shields said. "When they choose to speak about it, they
have to make accurate representations."
In October 2011, SEC Chief Administrative Law Judge Brenda
Murray dismissed fraud claims against State Street's former
chief investment officer, John Flannery, and the bank's former
product engineer, James Hopkins, saying she felt they exhibited
"candor" and that the division's case lacked evidence.
The decision was a blow for the SEC, which has fought to
defend its record of targeting some bank officials for alleged
wrongdoing during the 2007-2009 financial crisis.
The appeal also comes amid increasing scrutiny of the
agency's track record in trials.
Although the SEC has had some big wins, it has also suffered
from a string of recent losses, primarily in insider-trading
In the case against Flannery and Hopkins, the SEC alleges
each had a key role in marketing the bank's Limited Duration
Bond fund, which was supposed to serve as an alternative to a
money market fund, generally considered a safe investment.
The SEC, however, said the fund in 2007 was almost entirely
invested in subprime mortgage-backed securities. Such assets,
made up of loans to those with poor credit and other high-risk
borrowers, are often blamed for triggering the financial crisis.
Flannery and Hopkins were involved in drafting letters and
other communications to investors that failed to disclose the
full picture of the fund's subprime concentration.
Lawyers for the two men on Friday disputed those accusations
and urged the SEC to uphold Murray's 2011 decision.
"Jim Hopkins ... did nothing wrong. He was a good man. He
has been living with this cloud over his head for many years,"
said John Sylvia, an attorney for Hopkins.
"The division had a full and fair opportunity to make their
case and didn't because there was no case."
The SEC's commissioners did not give any hints on how they
may rule in the matter.
In several instances, SEC Chair Mary Jo White and Democratic
Commissioner Kara Stein asked an attorney for Flannery questions
about his client's role in drafting some of the letters and
whether their contents were deceptive.
"Even if Mr. Flannery did not make the statements in the ...
letters or preside over them ... why did he not commit a
deceptive act by participating in the drafting" of letters that
may have "omitted material facts?" White asked.
The SEC's five commissioners must now issue a ruling in the
case. If the losing party disagrees with the decision, it can
still be appealed to a federal appeals court.
(Reporting by Sarah N. Lynch; Editing by Paul Simao)