State Street prepares for legal claims

First came losses on mortgage-related securities. Now, the lawsuits.

Investing giant State Street Corp. on Thursday said it recorded $618 million in expenses to cover possible payouts for legal claims that it mishandled clients’ money by investing in risky securities such as sub-prime mortgage bonds.

The firm, the world’s biggest institutional money manager, also replaced its investment management chief.

State Street, which oversees about $2 trillion, has recently been named in lawsuits brought by clients Prudential Retirement Insurance & Annuity Co., publisher UnitSystems Inc. and Nashua Corp., a maker of paper and imaging products.

The company acknowledged that some clients had raised concerns as to whether its management of certain fixed-income funds was “consistent with the customers’ investment intent.”

But Boston-based State Street said it intended to “vigorously” defend against claims tied to customers’ soured investments -- losses that the company said largely arose from changes in market conditions.

“We’re not capitulating on anything,” Chief Executive Ronald Logue told analysts during a conference call. “We’re just trying to put it behind us.”

William Hunt, 45, quit Wednesday as chief of the firm’s State Street Global Advisors money management unit. James Phalen, 57, head of international operations for investment servicing, research and trading, was named interim chief.

Banc of America Securities analyst Kenneth Usdin said Hunt’s departure and the size of the provision for legal costs “indicate that the lawsuits and performance issues are not frivolous and could require some restitution” to investors.

Still, the company’s stock soared $6.49 to $85.37. Although the provision is expected to shave $279 million, or 71 cents a share, from fourth-quarter earnings after taxes, State Street said that profit excluding it would beat its previous expectations.