(Bloomberg News) The U.S. Securities and Exchange Commission may seek sanctions against two former State Street Corp. executives accused of misleading investors in a bond fund involved in a $313 million settlement with the agency.

John Flannery and James Hopkins "played an instrumental role" in letters touting as safe a fund that was almost entirely invested in securities and derivatives backed by the subprime mortgages, the SEC said yesterday. State Street, the second-largest money manager for institutions, resolved related claims in February without admitting or denying the allegations.

Lawmakers and investors have faulted the SEC for suing companies in cases stemming from subprime-mortgage crisis without holding individuals responsible. An SEC administrative judge will determine whether to impose penalties or other sanctions against Flannery, State Street's chief investment officer of the Americas until November 2007, and Hopkins, a former product engineer, the agency said.

"It is unfair and unjust that the SEC has chosen to bring claims against Mr. Flannery when he believed that the letters were accurate and he followed the advice" of State Street's lawyers, said Mark Pearlstein, his attorney at McDermott Will & Emery. "He fully cooperated with the SEC's investigation, and the evidence demonstrates that Mr. Flannery acted in complete good faith."

Hopkins is "disappointed" by the SEC's allegations and "fully expects to be exonerated once the true facts are presented," John Sylvia, his attorney at Mintz Levin Cohn Ferris Glovsky & Popeo PC, said in a statement.

The SEC's claims were related to State Street's Limited Duration Bond Fund, which was marketed as an alternative to a money-market fund. The Boston-based firm failed to disclose to some investors the extent of the fund's investments in bonds backed by subprime home loans, the SEC said.

"State Street has resolved this matter both in terms of addressing client concern as well as settling with the SEC," said spokeswoman Arlene Roberts, declining to comment on the case against Flannery and Hopkins.