UPDATE 3-State Street adds $250 mln to legal fund, cuts Q3

NEW YORK, Nov 6 (Reuters) - State Street Corp set aside an additional $250 million to cover claims by investors who lost money on risky mortgages, after using up more than two-thirds of a $625 million legal reserve set up in 2007. The Boston-based company, one of the world's largest institutional investors, also said in a quarterly filing that it has discussed settling fraud charges related to this matter with U.S. and state regulators. State Street created the reserve after mortgage securities in accounts managed by its State Street Global Advisors unit lost value when credit markets tightened in the summer of 2007. This led many unhappy investors to sue, and by Sept. 30, 2009 the reserve had fallen to $193 million. The additional sum boosts the reserve to $443 million. State Street, which invests $1.7 trillion and has $17.9 trillion in custody assets, reduced its previously reported third-quarter results to reflect the larger reserve. Revised quarterly profit is $327 million, or 66 cents per share, compared with a previously reported $516 million, or $1.04. It also revised its return on equity to 10.2 percent from 16 percent. When the company announced its earnings last month, its chief executive officer said that no change had been made to the reserve,but that it was constantly being monitored. The company still sees full-year operating profit, excluding items and the additional reserve, of $4.13 to $4.17 per share, down about 16 percent from a year earlier. State Street said the increased reserve should be sufficient, and includes enough to cover costs from possible U.S. Securities and Exchange Commission civil charges over its mortgage investments, and a recent $89.75 million settlement with some employee benefit plans. A Manhattan federal judge has set a Feb. 17, 2010, hearing to consider final approval of the benefit plan accord. In the regulatory filing, State Street said it has been in talks to resolve an SEC "Wells notice." It has also held settlement discussions with Massachusetts' top securities regulator and the state's Attorney General. No settlements have been reached the company said. State Street shares closed Friday trading down $1.36, or 3.2 percent, at $41.45 on the New York Stock Exchange. (Reporting by Jonathan Stempel and Svea Herbst; Editing by Derek Caney, John Wallace, Leslie Gevirtz) Keywords: STATESTREET/ ([e-mail] [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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