SEC considers appeal of State Street fraud case

Federal regulators are getting a do-over in a major case related to the financial crisis, an administrative prosecution alleging that, amid the subprime meltdown of 2007, two former State Street Bank and Trust employees misled investors about their exposure to the deteriorating mortgages.

An administrative law judge rejected the charges in October, saying John P. Flannery and James D. Hopkins committed no fraud.

But the Securities and Exchange Commission announced Friday that it will consider an appeal by its own enforcement division, which acted as prosecutor in the case.

The October ruling showed the risks the SEC takes when its cases are contested instead of settled.

In 2010, State Street agreed to pay more than $300 million to resolve related charges without admitting or denying wrongdoing.

The SEC enforcement division alleges that Flannery and Hopkins essentially left investors with a false sense of security about certain State Street funds, even as State Street’s own pension fund withdrew its money.

The appeal puts the SEC’s five commissioners in the position of judge and jury.

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