John Flannery and James Hopkins are accused of marketing a product called a Limited Duration Bond Fund as an alternative to a money market fund for certain types of investors. By 2007, the fund was almost wholly invested in subprime residential mortgage-backed securities and derivatives, but the fund was marketed as less risky than a money market fund, and the concentration of subprime securities was not disclosed.
"Hopkins and Flannery misled State Street's investors about the risks and credit quality of a fund concentrated in subprime bonds and other subprime investments," said Robert Khuzami, director of the SEC's enforcement division.
The SEC went on to allege that some clients - such as investors who sat on internal advisory groups - got more complete information about the fund than others.
In February, the firm settled a related case by repaying investors $300 million. As part of that settlement, the SEC gained access to information about individuals involved with the fund.
Separately, State Street paid nearly $350 million to settle private lawsuits.
Hopkins and Flannery are accused of playing an "instrumental role" in drafting misleading communication to investors about the fund starting in July 2007, according to the SEC. Flannery served as a chief investment officer, and Hopkins was a product engineer at the time. Hopkins later led State Street's product engineering for North America.
State Street Bank is a subsidiary of State Street Corp., which received $2 billion in taxpayer capital through the Troubled Asset Relief Program in 2008. It repaid the money last year, and gave the Treasury Department an additional $60 million to repurchase the warrants it issued in connection with the TARP aid.