State Street Corporation (NYSE:STT) shares jumped today after the company announced that it is setting aside $618 million to cover legal expenses and other costs stemming from its fixed-income strategies. State Street decided to set up these reserves after several customers complained that subprime investments were made inappropriately, which the company acknowledged to a certain extent. Shares rose as many assumed the fallout would be much worse than was revealed.

“Some of our customers that were invested in the active fixed-income strategies have raised concerns that we intend to address,” said CEO Ronald Logue in a statement. “Nevertheless, we will continue to defend ourselves vigorously against inappropriate claims, including those that seek recovery of investment losses arising solely from changes in market conditions.”

State Street also announced that the CEO of the firm’s investment management division, William Hunt, would be stepping down and replaced by interim CEO James Phalen. The company did not detail the problems that caused the blow-up, but many are speculating that it was a result of stretching their money in order to boost returns through investment in subprime securities, commercial papers, and other risky investment instruments.

Shareholders applauded the fact that the company was able to sidestep most of the damages. State Street said it was on track to earn between $3.42 and $3.45 per share in 2007, which shows revenue growth of 20 to 22 percent – well above the range the company forecasted on October 16th. Combined, these factors make this a stock worth watching!

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