Ex-State Street Execs Charged In Defrauding Scheme

The Justice Department said on Tuesday (April 5) that two executives of State Street, a Boston financial services firm — among the largest asset managers globally, as well as being one of the largest custody banks — were charged in a scheme to “defraud at least six of the bank’s clients through secret commissions applied to billions of dollars of securities trades,” the agency noted in a release.

The pair charged — Ross McLellan and Edward Pennings — face a five-count indictment, touching on conspiring to commit securities fraud and wire fraud and also two counts apiece of securities and wire fraud.

The indictment itself alleges that the two — during a timeframe that stretched between Feb. 2010 and Sept. 2011 — added secret commissions to both equity and fixed-income trades for clients of the “transition management” business, a subset that helps clients move portfolios across asset classes or managers or even liquidate large portfolios. The commissions came on top of fees already agreed upon and levied. The commissions came despite alleged written instructions that those clients were not to be charged commissions. Then, according to the indictment, the duo hid the trades from both the clients and the compliance staff within the bank.

In a statement by Carmen Ortiz, U.S. Attorney of the District of Massachusetts: “The secret conversations and backroom plotting laid bare in today’s charges paint a vivid picture of a brazen fraud. 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.”