State Street adds $250 million to legal reserve

BOSTON - State Street Corp. on Friday said it added $250 million to a legal reserve, and revised its third-quarter earnings results downward to reflect the change.

The financial services firm kept its 2009 forecast, but shares slipped in midday trading.

State Street, which provides financial services to institutional investors like retirement plans and insurance companies, said it boosted the legal reserve to cover potential fines from regulatory probes and to address ongoing lawsuits regarding risky investments.

The Boston company established the reserve during the fourth quarter of 2007 with $625 million after being hit with a number of suits charging it misrepresented its investment strategy. In an August regulatory filing, it said it had made $432 million in payments, and had $193 million left as of June 30.

State Street revealed in June that the Securities and Exchange Commission is investigating disclosures and management of the bank's fixed-income investments during 2007 and earlier periods.

That year, before the housing market collapsed, State Street's fixed-income investment unit increasingly invested in securities and bonds backed by subprime mortgages — loans given to customers with poor credit history. As the housing market unraveled in late 2007 and defaults on mortgages began to skyrocket, the value of those investments plummeted, leading to losses in the investment funds.

The company has also said it is cooperating with investigations mounted by the Massachusetts secretary of state and the Massachusetts attorney general.

Some customers filed lawsuits questioning whether the investments fit strategies consistent with those of more traditional fixed-income funds.

Friday, State Street said it recently entered into a settlement of the class action suit. A proposed settlement of $89.75 million is awaiting court approval, the company said.

The addition to the reserve was dated back to Sept. 30. State Street updated its third-quarter results to include the $250 million set aside, and now said its profit for the period was $327 million, or 66 cents per share. In late October, it had posted third-quarter profit of $516 million, or $1.04 per share.

State Street kept its full-year earnings forecast for adjusted earnings between $4.13 and $4.17 per share and a 16-percent operating revenue decline. Based on operating revenue of $10.48 billion for 2008, that implies a forecast of $8.8 billion revenue.

Analysts polled by Thomson Reuters, on average, expect profit of $4.11 per share, on revenue of $8.66 billion.

State Street shares fell $1.04, or 2.4 percent, to $41.77. The stock has traded between $14.43 and $55.87 in the past 52 weeks and started Friday's session up about 9 percent for the year.

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