State Street Corporation Agrees to Pay More than $64 Million to Resolve Fraud Charges
Massachusetts-based global financial services company State Street Corporation (State Street) entered into a deferred prosecution agreement and agreed to pay a $32.3 million criminal penalty to resolve charges that it engaged in a scheme to defraud a number of the bank’s clients by secretly applying commissions to billions of dollars of securities trades. State Street also agreed to offer an equal amount as a civil penalty to the U.S. Securities and Exchange Commission (SEC).
Acting Assistant Attorney General David Bitkower of the Justice Department’s Criminal Division, Acting U.S. Attorney William D. Weinreb of the District of Massachusetts and Special Agent in Charge Harold H. Shaw of the FBI’s Boston Division announced today.
“State Street engaged in a concerted effort to fleece its clients by secretly charging unwarranted commissions,” said Acting Assistant Attorney General 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.”
“State Street cheated its customers by agreeing to charge one price for its services and then secretly charging them something else,” said Acting U.S. Attorney Weinreb. “Banks that defraud their clients in this way must be held accountable, no matter how big they are.”
“State Street engaged in an elaborate overcharge scheme which resulted in millions of ill-gotten profits and violated the trust of their clients,” said Special Agent in Charge Shaw. “This agreement with State Street demonstrates the FBI’s commitment to aggressively pursue financial fraud, uncover schemes that undermine investor confidence and hold financial institutions accountable.”
According to State Street’s admissions, bank employees conspired to add secret commissions to fixed income and equity trades 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. State Street employees took steps to hide the commissions from the clients. State Street also misrepresented its performance to one of these clients in order to conceal a trading loss.
State Street entered into a deferred prosecution agreement (DPA) in connection with a criminal information charging the company with one count of conspiracy to commit wire fraud and securities fraud. Pursuant to its agreement with the department, State Street agreed to pay a criminal penalty of $32.3 million. State Street also agreed to continue to cooperate with the department and with foreign authorities in any ongoing investigations and prosecutions relating to the conduct (including of individuals); to enhance its compliance program; and to retain an independent corporate compliance monitor for a period of three years.
The department reached this resolution based on a number of factors, including that State Street has already fully repaid the clients who were victims of the scheme. State Street did not receive credit for voluntarily disclosing the misconduct and received only partial cooperation credit because the company did not fully cooperate with the investigation from the start and also because inadequacies in its initial internal investigation prevented it from being able to timely disclose all relevant facts.
In connection with the government’s investigation, Ross McLellan, 44, and Edward Pennings, 45, were charged on April 5, 2016, with conspiring to commit securities fraud and wire fraud as well as two counts each of securities fraud and wire fraud. Their trial is currently scheduled for Oct. 23, 2017. The charges against McLellan and Pennings are merely allegations and the defendants are presumed innocent unless and until proven guilty.
The FBI’s Boston Field Office investigated the case. Trial Attorney Aisling O’Shea of the Criminal Division’s Fraud Section and Assistant U.S. Attorney and Deputy Chief of Economic Crimes Section Stephen E. Frank of the District of Massachusetts are prosecuting the case. The SEC provided valuable assistance to the prosecution.
The Fraud Section plays a pivotal role in the Department of Justice’s fight against white collar crime around the country. Today’s resolution is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF), which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys’ offices and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants, including more than 2,700 mortgage fraud defendants. For more information on the task force, visit www.stopfraud.gov.