Bank sets up $618m sub-prime legal fund

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State Street, the US investment manager and global custodian, revealed yesterday that it is putting aside $618m (313m) to cover potential legal claims against its fixed-income investment arm after the sub-prime mortgage crisis.

The bank also announced that William Hunt, chief executive of investment operation State Street Global Advisors, had resigned with immediate effect.

The legal fund, which will reduce State Street's fourth-quarter earnings by $279m, was launched after mounting concern that Wall Street investment firms face hugely damaging lawsuits from clients who have lost money as a result of the sub-prime debacle.

State Street said it was concerned about the under-performance of "certain active fixed-income strategies" and said it would address "customer concerns as to whether the execution of these strategies was consistent with the customers' investment intent". Some customers of banks with sub-prime exposure have claimed they had little idea about the risks to which they were being exposed through investments in commercial paper backed by sub-prime assets. State Street itself is already facing three lawsuits from clients who claim they were sold investment strategies billed as low-risk only to discover later that they were holding mortgage-backed securities. Its chief executive Ronald Logue said: "We have reviewed the actively managed fixed-income strategies at State Street Global Advisors which contained investments backed by sub-prime mortgages.

"Based on our review and discussions with certain customers who were invested in these strategies, we have established this reserve to address legal exposure and other costs relating to these strategies."

However, Mr Logue also warned that State Street would defend itself against legal actions taken by clients who had simply been hit by market movements, rather than mis-selling.