Secretary of the Commonwealth William Francis Galvin has slapped State Street Global Advisors (SSgA), a subsidiary of Boston-based State Street Bank & Trust Co., with nearly $5 million in fines related to an "enormous" 2006 securities deal gone sour.

The fine is the first enforcement action to come out of Galvin’s wide-ranging investigation into the origins of the financial crisis.

In a Feb. 27 consent order, State Street is not required to admit any wrongdoing, but details of the deal that drew Galvin’s scrutiny are presented.

SSgA was recruited by Deutsche Bank to act as investment manager for a $1.56 billion hybrid collateralized debt obligation (CDO) called Carina CDO Ltd. Carina was created by Deutsche Bank and Illinois-based hedge fund Magnetar Capital LLC and included tranches of residential mortgage backed securities, auto loans and student loan debt.

In the course of building the CDO, it became clear that Magnetar, which had bought the most risky "equity" tranche with the highest rate of return, was attempting to take a short position on the transaction.

"We are not comfortable with [Magnetar] shorting the deal," one SSgA manager is alleged to have emailed to a Deutsche Bank executive.

Galvin alleges SSgA failed to disclose Magnetar’s involvement in the creation of the CDO or its short position.

Carina raised about $450 million, mostly from institutional investors, but defaulted and was forced into liquidation. Most of the $450 million invested was lost, according to the order.

The order requires SSgA to pay a $1.5 million administrative penalty and to "disgorge" $3.5 million in fees, profits, commissions and other "remunerations" to the commonwealth.

SSgA landed in hot water for "knowing that Magnetar was involved and directing where this stuff would go in this CDO, and they didn’t tell their customers," Galvin’s spokesman, Brian McNiff, told Banker & Tradesman. "They’re out there flogging it, and they didn’t tell (customers) that (Magentar) was doing the picking. They also knew that Magnetar was going to be shorting parts of it, at least."

McNiff said there are "banks, plural" in Galvin’s ongoing investigation and that "maybe one or more elements" of the SSgA case could appear in other enforcement actions, "but we’re looking at different things."

In response to the order, State Street offered the following statement:

"State Street has reached a settlement with the Massachusetts Securities Division (MASD) with respect to the Carina CDO, an entity which issued and sold notes to a limited number of sophisticated, qualified institutional investors in 2006-2007. State Street Global Advisors was hired by the CDO sponsor to act as the investment manager for Carina. In reaching this settlement, State Street neither admits nor denies the MASD’s findings or conclusions concerning information contained in the offering documents for the CDO." 

Secretary of the Commonwealth William Francis Galvin has slapped State Street Global Advisors (SSgA), a subsidiary of Boston-based State Street Bank & Trust Co., with nearly $5 million in fines related to an "enormous" 2006 securities deal gone sour.

The fine is the first enforcement action to come out of Galvin’s wide-ranging investigation into the origins of the financial crisis.

In a Feb. 27 consent order, State Street is not required to admit any wrongdoing, but details of the deal that drew Galvin’s scrutiny are presented.

SSgA was recruited by Deutsche Bank to act as investment manager for a $1.56 billion hybrid collateralized debt obligation (CDO) called Carina CDO Ltd. Carina was created by Deutsche Bank and Illinois-based hedge fund Magnetar Capital LLC and included tranches of residential mortgage backed securities, auto loans and student loan debt.

In the course of building the CDO, it became clear that Magnetar, which had bought the most risky "equity" tranche with the highest rate of return, was attempting to take a short position on the transaction.

"We are not comfortable with [Magnetar] shorting the deal," one SSgA manager is alleged to have emailed to a Deutsche Bank executive.

Galvin alleges SSgA failed to disclose Magnetar’s involvement in the creation of the CDO or its short position.

Carina raised about $450 million, mostly from institutional investors, but defaulted and was forced into liquidation. Most of the $450 million invested was lost, according to the order.

The order requires SSgA to pay a $1.5 million administrative penalty and to "disgorge" $3.5 million in fees, profits, commissions and other "remunerations" to the commonwealth.

SSgA landed in hot water for "knowing that Magnetar was involved and directing where this stuff would go in this CDO, and they didn’t tell their customers," Galvin’s spokesman, Brian McNiff, told Banker & Tradesman. "They’re out there flogging it, and they didn’t tell (customers) that (Magentar) was doing the picking. They also knew that Magnetar was going to be shorting parts of it, at least."

McNiff said there are "banks, plural" in Galvin’s ongoing investigation and that "maybe one or more elements" of the SSgA case could appear in other enforcement actions, "but we’re looking at different things."

In response to the order, State Street offered the following statement:

"State Street has reached a settlement with the Massachusetts Securities Division (MASD) with respect to the Carina CDO, an entity which issued and sold notes to a limited number of sophisticated, qualified institutional investors in 2006-2007. State Street Global Advisors was hired by the CDO sponsor to act as the investment manager for Carina. In reaching this settlement, State Street neither admits nor denies the MASD’s findings or conclusions concerning information contained in the offering documents for the CDO."