State Street (STT) Increases Legal Reserve by $250M; Comments on Q3, FY09 Outlook
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State Street Corporation (NYSE: STT) today announced that it has added $250 million, as of September 30, 2009, to the reserve it established in 2007 to address legal exposure related to losses incurred by investors in certain active fixed-income strategies managed by State Street Global Advisors. The Company believes the adjusted reserve should be sufficient to account for a potential resolution of proceedings by the Securities and Exchange Commission and other governmental authorities, and to address ongoing litigation with respect to this matter.
Since 2007, SSgA has made significant changes to its organization, including establishing new leadership, and has made substantial investments in its operating platform, including its risk management and compliance operations.
State Street also announced that it recently entered into a settlement of the purported class action with respect to ERISA participants in the active fixed -income strategies. The proposed settlement of $89.75 million is subject to court approval.
Prior to recording the $250 million provision for legal exposure, the legal reserve totaled $193 million. After giving effect to the $250 million provision, the reserve as of September 30, 2009, as adjusted is $443 million, and should be sufficient to settle the above matters, including the purported class action.
For Q309, updated reported results are EPS of $0.66 on net income of $327 million. Return on common shareholders' equity is 10.2%, down from the previously announced 16.0%. Operating-basis results for the third quarter of 2009 exclude the provision for legal exposure and are unchanged from the operating-basis results announced on October 20, 2009.
State Street's outlook for FY09 remains unchanged with operating basis revenue expected to decline about 16% from the record level of 2008; operating EPS, excluding the impact of the extraordinary loss recorded upon consolidation of the commercial paper conduits in the second quarter of 2009, and the provision for legal exposure announced today, to be between $4.13 and $4.17 and operating return on equity to be between 14 and 17%.
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