SEC Accuses Former |State Street Exec of Fraud

     BOSTON (CN) — A former State Street executive unlawfully charged about $20 million in secret markups and fees to securities customers, the SEC claims in Massachusetts Federal Court.
     The Securities and Exchange Commission (SEC) claims that Ross McLellan and fellow State Street Corp. executives conducted a scheme of defrauding investors with hidden markups on U.S. and European securities.
     The complaint, filed Friday, alleges that McLellan would identify customers of State Street’s Transition Management service to overcharge while directing his fellow employees to levy previously undisclosed markups and fees.
     “McLellan, along with co-schemers, developed and orchestrated a deliberate strategy to charge Transition Management customers hidden mark-ups on certain transactions,” the lawsuit states. “Among other things, State Street employees, under the supervision of McLellan, made misrepresentations concerning pricing in connection with certain transition engagements. These misrepresentations were made in a variety of communications to customers, including false trading statements, pre-trade estimates, and post-trade reporting.”
     When McLellan and his alleged co-schemers were confronted by a customer who noticed the markups, McLellan instructed other State Street employees to claim that they were the result of “fat finger error” or “inadvertent commissions,” according to the 30-page complaint.
     “In addition to instructing his subordinates generally to execute the hidden mark-up scheme, in multiple instances McLellan gave specific instructions aimed at keeping mark-ups hidden, including what prices to charge and what levels at which to execute trades,” the complaint states.
     The SEC estimates that McLellan’s alleged scheme brought in an additional $20 million in revenue to State Street.
     The agency says McLellan violated the Securities Act of 1933 and the Securities Exchange Act of 1934.
     On April 5, the Massachusetts U.S. Attorney’s Office announced parallel criminal charges against McLellan and Edward Pennings, who was not charged in the SEC’s May 13 civil complaint.
     In January 2014, the United Kingdom’s Financial Conduct Authority found that State Street deliberately overcharged six customers a total of $20,169,603, and imposed a financial penalty of £22,885,000.
     McLellan’s attorney, Martin Weinberg, was confident that McLellan would be cleared of any securities violations.
     “The evidence will ultimately and compellingly show that Ross McLellan did not violate any securities law,” Weinberg said in a prepared statement. “Every major bank charges its clients markups on its bond transactions in order to generate profits. And every dollar that is at issue in today’s complaint was received not by Mr. McLellan, but by the Bank for which he worked. Mr. McLellan trusts the federal court system and intends to mount a full and successful defense to today’s allegations.”

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