December 8, 2015 / 11:32 PM / 3 years ago

U.S. appeals court overturns SEC commissioners in State Street case

(Reuters) - A federal appeals court on Tuesday overturned a U.S. Securities and Exchange Commission decision to hold two former State Street Corp executives liable for misleading investors about a seemingly low-risk mutual fund’s exposure to subprime bonds.

The headquarters of the U.S. Securities and Exchange Commission (SEC) are seen in Washington, July 6, 2009. REUTERS/Jim Bourg

The 1st U.S. Circuit Court of Appeals in Boston said the commission’s findings against John Flannery and James Hopkins, respectively State Street’s former chief investment officer and former head of North American product engineering, were “not supported by substantial evidence.”

The decision is a defeat for SEC Chair Mary Jo White, who last December joined a 3-2 majority in holding Flannery and Hopkins civilly liable.

Flannery and Hopkins were accused in 2010 of having marketed State Street’s Limited Duration bond fund three years earlier as safe, even though the fund had become invested almost entirely in risky securities.

The fund, which once had $1.4 billion of assets, lost about 37 percent of its value over three weeks in August 2007, the SEC said.

Both defendants scored a rare win in 2011 when SEC Chief Administrative Law Judge Brenda Murray dismissed the case.

But SEC enforcement staff appealed, and won a reversal from the full commission three years later.

Hopkins was fined $65,000 and Flannery $6,500, and both were suspended from the investment industry for a year.

In Tuesday’s decision, Circuit Judge Sandra Lynch said an Aug. 2, 2007 letter to investors about the fund’s strategy, a draft of which Flannery had seen, was not misleading, and therefore Flannery could not be held liable for it.

She said the SEC did not show that Hopkins’ conduct was at least reckless, including for failing to update a presentation slide that showed the fund had reduced its credit risk.

The appeals court did not review an Aug. 14, 2007 investor letter from Flannery himself about market volatility.

But even if that letter were misleading, “there is not substantial evidence to support the Commission’s finding that Flannery engaged in a fraudulent ‘practice’ or ‘course of business,’” Lynch wrote.

SEC spokespeople did not immediately respond to requests for comment.

“It is a complete repudiation of the SEC’s factual findings,” Mark Pearlstein, a McDermott Will & Emery partner representing Flannery, said in an interview. “At long last, my client has been exonerated.” Flannery is no longer in the securities industry, he said.

John Sylvia, a lawyer for Hopkins, was not immediately available for comment.

The cases are Flannery v SEC, 1st U.S. Circuit Court of Appeals, No. 15-1080; and Hopkins v SEC in the same court, No. 15-1117.

Reporting by Jonathan Stempel in New York; Editing by David Gregorio

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