BOSTON – Boston-based global financial services company State Street Corporation has entered into a deferred prosecution agreement and agreed to pay a $32.3 million criminal penalty to resolve the government’s criminal investigation into a scheme to defraud at least six of the bank’s clients through secret commissions applied to billions of dollars of securities trades. State Street also agreed to offer an equal amount as a civil penalty to the Securities and Exchange Commission (SEC).
In April 2016, the government charged two former high-ranking State Street executives, former Executive Vice President Ross McLellan and former Senior Managing Director Edward Pennings, with conspiracy, securities fraud and wire fraud in connection with the same scheme. McLellan and Pennings are scheduled to go to trial before U.S. District Court Judge Leo T. Sorokin in October 2017.
“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 William D. Weinreb. “Banks that defraud their clients in this way must be held accountable, no matter how big they are.”
“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.”
“State Street engaged in an elaborate overcharge scheme which resulted in millions of ill-gotten profits and violated the trust of their clients,” said Harold H. Shaw, Special Agent in Charge of the Federal Bureau of Investigation, Boston Field Division. “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 admissions made in the resolution documents, State Street 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 also took steps to hide the commissions from clients and misrepresented its performance to one of these clients in order to conceal a trading loss.
As part of the deferred prosecution agreement, State Street has agreed to pay the criminal penalty; to offer an identical amount to the SEC to resolve civil charges; to continue to cooperate with the Department of Justice 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 three years. The Justice Department reached this resolution based on a number of factors including the fact that State Street has already fully repaid the clients who were victims of the scheme, has paid a substantial penalty to the UK Financial Conduct Authority, and has offered to pay a civil penalty to the SEC that is equal to the criminal penalty.
Acting U.S. Attorney Weinreb, Acting AAG Bitkower and SAC Shaw made the announcement today. The United States Attorney’s Office and the Fraud Section received valuable assistance from the SEC and from authorities in the United Kingdom. The case is being prosecuted by Assistant U.S. Attorney Stephen E. Frank, Deputy Chief of Weinreb’s Economic Crimes Unit, and Trial Attorney Aisling O’Shea of the Criminal Division’s Fraud Section.