Two former State Street executives have been charged by the Department of Justice with scheming to defraud at least six of the bank's clients through secret commissions applied to billions of dollars of securities trades.
Ross McLellan and Edward Pennings were charged with securities fraud and wire fraud as well as conspiring to commit securities fraud and wire fraud. Mr. McLellan, a former executive vice president of the bank who served as president of its U.S. broker-dealer unit, was arrested on Tuesday and appeared in U.S. District Court in Boston. Mr. McLellan pleaded not guilty and was released on $250,000 bond secured by his house, confirmed Christina DiIorio-Sterling, a spokeswoman for the U.S. attorney. His next court date is May 19.
Mr. Pennings, a former managing director at State Street, is believed to be living abroad.
“The secret conversations and backroom plotting laid bare in today's charges paint a vivid picture of a brazen fraud,” said U.S. Attorney Carmen M. Ortiz of the District of Massachusetts in a news release announcing the indictment. “The defendants never thought anyone would hear those conversations — conversations in which they plotted to overcharge their clients by millions of dollars and to hide their tracks.”
Added Ms. Ortiz: “With each trade, they chipped away at the savings of thousands of retirees whose pensions they were charged with safeguarding. Bankers who abuse their clients' trust in this way must be held accountable.”
The indictment alleges that, between February 2010 and September 2011, Messrs. McLellan and Pennings conspired with others to add secret commissions to fixed-income and equity trades performed for at least six clients of the bank's transition management business.
The commissions were charged on top of fees the clients had agreed to pay the bank, and despite written instructions to the bank's traders that generally reflected that the clients were not to be charged trading commissions.
Messrs. McLellan and Pennings allegedly took steps to hide the commissions from the clients and others within the bank, including by directing that the commissions not be broken out in post-trade reports.
“These indictments relate to two former employees who were separated from State Street several years ago. The charges relate to the same transitions for six clients conducted by our U.K. Transition Management business during 2010 and 2011 as to which we entered into a settlement with the (Financial Conduct Authority) in 2014,” said State Street spokesman Brendan Paul in an e-mailed statement.
The statement added that State Street has “been cooperating with the U.S. governmental authorities about this matter for the past few years. Since 2011, we have significantly strengthened our controls and reporting mechanisms within this business.”
The ongoing investigation is being conducted by the FBI.
The indictment alleges, among other things, that:
- In a telephone call in March 2010, Mr. Pennings instructed an unidentified co-conspirator in the transition management unit not to talk about the plans to charge hidden commissions on one transaction “with anyone … because it's not going to help our story. Don't even share it with the rest of the team, to be honest.”
- In June 2010, Mr. McLellan and the unidentified co-conspirator requested that the bank's traders provide them with the reported daily high and low prices of securities the bank had traded for the client so that they could determine the amount of the commissions to be applied to each security without attracting the client's attention by exceeding the bounds of reported prices.
- In March 2011, Mr. McLellan instructed a U.S. fixed-income trader to charge a one-basis-point commission to each trade conducted for another client — notwithstanding that the written trading instructions for the transaction said to charge zero commissions — and subsequently instructed the trader to delete any reference to the commissions from the trading results he sent to the transition manager assigned to the project.
- In June 2011, when one of the affected clients inquired about whether it had, in fact, been charged commissions in breach of its agreement with the bank, it is alleged that Mr. Pennings initially denied that any commissions had been charged. Later — at Mr. McLellan's direction — Mr. Pennings acknowledged only that some commissions had been “inadvertently” charged on securities traded in the U.S., but did not disclose that they had, in fact, been intentionally charged, in the U.S. and in Europe.
Messrs. McLellan and Pennings allegedly sought to mislead the bank's compliance staff into believing that the commissions had been charged in error and that the amount of the overcharges was limited to the commissions applied on U.S. securities.
