December 18, 2014 / 9:01 PM / 4 years ago

Ex-State Street executives to appeal SEC ruling in crisis-era case

WASHINGTON (Reuters) - Attorneys for two former State Street Corp executives plan to file an appeal after the U.S. Securities and Exchange Commission this week partially reversed a judge’s decision, ruling they mislead investors in a fund exposed to subprime mortgages.

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

The attorneys said the divided SEC opinion failed to take the judge’s careful analysis of the evidence into full account.

In a 3-2 decision issued on Dec. 15, the SEC said James Hopkins, a former product engineer at the bank, is liable for intentional fraud and should pay $65,000 in penalties and be suspended from working for an asset manager for one year.

The SEC also found the former chief investment officer, John Flannery, should be held liable for one count of negligence-based fraud and pay a $6,500 fine.

The SEC’s opinion marks a setback for Flannery and Hopkins. In 2011, SEC Chief Administrative Law Judge Brenda Murray dismissed all charges against them, ruling the agency’s enforcement division lacked evidence, and that the two defendants exhibited candor during their testimony at trial.

The SEC alleged the two men each played a key role in marketing State Street’s Limited Duration Bond fund.

The SEC claims that in 2007, the fund was almost entirely invested in subprime mortgage-backed securities, but that such risks were not fully disclosed to investors.

When the crisis hit, the SEC said that State Street did not provide the same advice to all investors, allowing some to flee while others stayed and were left with illiquid holdings.

In interviews with Reuters this week, both attorneys said the SEC largely affirmed Murray’s ruling, adding that they will fight to have the remaining charges overturned in a U.S. appeals court.

“We were disappointed that with two members dissenting, the commission disregarded Chief Judge Murray’s thoughtful analysis and ignored the great weight of the evidence in reversing on a single issue,” said John Sylvia, an attorney with Mintz Levin who represents Hopkins.

Mark Pearlstein of McDermott Will & Emery, who represents Flannery, also said the SEC committed “legal errors.”

In an SEC administrative proceeding, an independent judge employed by the agency presides over trials and decides whether the enforcement division has proven its case.

The losing party can appeal, first before the full five-member commission, and later, to a U.S. appeals court.

The SEC’s enforcement division appealed the ruling before the SEC’s commissioners in the case and oral arguments were heard in July.

In Monday’s ruling to partially reverse Murray’s decision, the two Republican commissioners, Michael Piwowar and Daniel Gallagher, dissented.

The order did not elaborate on their reasons for the dissent.

Reporting by Sarah N. Lynch; Editing by Jeffrey Benkoe

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