Bogus Commissions Will Cost State Street $64M

BOSTON (CN) – State Street Corp. has agreed to pay $64.6 million to settle charges that it defrauded customers by secretly tacking unwarranted commissions onto multibillion securities trades.

The settlement is evenly split as a criminal penalty and as a civil penalty paid to the Securities and Exchange Commission, according to press release from the U.S. Department of Justice.

“State Street engaged in a concerted effort to fleece its clients by secretly charging unwarranted commissions,” said Acting Assistant Attorney General David Bitkower. “The bank fundamentally abused its clients’ trust and inflicted very real financial losses.  The department will hold responsible those who engage in this type of criminal conduct.”

Wednesday’s settlement came nine months after federal prosecutors brought charges in connection to the fraud against Ross McLellan, 44, and Edward Pennings, 45 – both of whom were former State Street executives.

The firm noted in a statement Wednesday that it has accepted responsibility for the regrettable actions of its former employees.

“The company fully reimbursed the six clients that were impacted, terminated responsible employees, appointed new executives to lead its transition management business, and implemented new and stronger controls,” State Street said in a statement.

In a civil case against McLellan in May, the SEC accused the Hingham, Mass., man of identifying customers of State Street’s Transition Management service to overcharge while directing his fellow employees to levy previously undisclosed markups and fees.

When a customer who noticed the markups confronted McLellan and his alleged co-schemers, McLellan instructed other State Street employees to claim that they were the result of “fat finger error” or “inadvertent commissions,” the complaint had said.

The SEC estimates that the scheme brought in an additional $20 million in revenue to State Street. Pennings is not a defendant to the civil action.

Pennings and McLellan’s trial is scheduled to begin on Oct. 23.

Back in 2014, the United Kingdom’s Financial Conduct Authority found in January 2014 that State Street had deliberately overcharged six customers a total of $20 million. State Street faced a financial penalty of 22.8 million pounds. Back in Massachusetts, where the firm is based, State Street paid $382 million this past July to settle allegations that it deceived clients of its foreign-currency exchange business.

As part of the Wednesday settlement, State admitted that its bank employees conspired to add secret commissions to certain fixed income and equity trades.

These trades were performed for at least six clients of the bank’s “transition management” business, which helps institutional clients move their investments between and among asset managers or liquidate large investment portfolios.

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.

Prosecutors say State Street employees took steps to hide the commissions from the clients, and that State Street misled one clients about its performance to conceal a trading loss.

“State Street cheated its customers by agreeing to charge one price for its services and then secretly charging them something else,” Acting U.S. Attorney Weinreb said in a statement. “Banks that defraud their clients in this way must be held accountable, no matter how big they are.”

State Street entered into a deferred prosecution agreement in connection with a criminal information charging the company with one count of conspiracy to commit wire fraud and securities fraud.

The deal requires State Street to continue cooperating with the Justice Department and with foreign authorities in any ongoing investigations and prosecutions relating to the conduct.

It must also enhance its compliance program and for three years employ an independent corporate compliance monitor.

Prosecutors note that State Street has already fully repaid clients victimized by the scheme, and that the firm did not receive credit for voluntarily disclosing the misconduct. Because the company did not fully cooperate with the investigation from the start, and because of inadequacies in its initial internal investigation, State Street received only partial cooperation credit, according to the Justice Department’s statement.