Former Senior Executives of Global Financial Services Company Charged in Scheme to Defraud Clients through Secret Trading Commissions
BOSTON – Two former high-ranking executives of a Boston-based financial services company, which is one of the world’s largest asset managers and custody banks, have been charged with engaging in a scheme to defraud at least six of the bank’s clients through secret commissions applied to billions of dollars of securities trades.
Ross McLellan, 44, of Hingham, Mass. and Edward Pennings, 45, who is believed to be living abroad, were charged in a five-count indictment with conspiring to commit securities fraud and wire fraud, as well as two counts each of securities fraud and wire fraud. McLellan, a former executive vice president of the bank who served as president of its U.S. broker-dealer unit, was arrested this morning in Hingham and will appear in U.S. District Court in Boston later today.
U.S. Attorney Carmen M. Ortiz of the District of Massachusetts, Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division and Special Agent in Charge Harold M. Shaw of the Boston Field Office of the Federal Bureau of Investigation made the announcement.
“The secret conversations and backroom plotting laid bare in today’s charges paint a vivid picture of a brazen fraud,” said U.S. Attorney Ortiz. “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. 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. And we will work hard to ensure that they are.”
“The defendants are charged with reaping millions of dollars of illicit profits by abusing their clients' trust and secretly setting their own inflated compensation,” said Assistant Attorney General Caldwell. "The charges announced today reflect our continued commitment to hold individuals accountable for toying with the integrity of our financial system.”
"As alleged, Ross McLellan and Edward Pennings cheated and lied to investors so that the bank could line its pockets. Actions like theirs undermine investor confidence. This case demonstrates the FBI's commitment to unraveling elaborate and complex schemes, motivated by sheer greed, that ultimately undermine our financial markets," said Special Agent in Charge Shaw.
The Indictment alleges that, between February 2010 and September 2011, McLellan and Pennings, together with others, 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. McLellan and Pennings then 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.
For example, the Indictment alleges, among other things, that:
In a telephone call in March 2010, 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, 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, McLellan instructed a U.S. fixed income trader to charge a one basis point (0.01%) 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 Pennings initially denied that any commissions had been charged. Later – at McLellan’s direction – Pennings acknowledged only that some commissions had been “inadvertently” charged on securities traded in the United States, but did not disclose that they had, in fact, been intentionally charged, in the United States and in Europe. McLellan and Pennings then 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.
The ongoing investigation is being conducted by the Federal Bureau of Investigation. The United States Attorney’s Office and the Fraud Section have also received valuable assistance from the Securities & Exchange Commission as well as from authorities in the United Kingdom, including the City of London Police. The Criminal Division’s Office of International Affairs also provided assistance. The case is being prosecuted by Assistant U.S. Attorney Stephen E. Frank, Deputy Chief of Ortiz’s Economic Crimes Unit and Trial Attorney Aisling O’Shea of the Criminal Division’s Fraud Section.