Former State Street executives indicted over alleged fraud
Two former State Street Corp. executives were indicted on criminal securities fraud charges in an alleged scheme to overcharge six large clients, the US attorney in Boston said Tuesday, the latest legal black eye for the financial services company.
Ross McLellan, 44, of Hingham, and Edward Pennings, 45, a Dutch citizen believed to be in England, were charged in the five-count indictment. McLellan, a former executive vice president of Boston-based State Street, who served as head of its US broker-dealer unit, was arrested Tuesday morning in Hingham, officials said.
In what US Attorney Carmen Ortiz called a “brazen fraud,” the pair allegedly generated millions of dollars in improper trading commissions from June 2010 into September 2011, from clients who had already paid fees to State Street for handling their accounts.
The customers included a British government pension fund and a Middle Eastern sovereign wealth fund, according to Ortiz’s office.
State Street is not named in the Boston complaint, but the company in 2014 agreed to pay $37.5 million to settle allegations in the matter with regulators in the United Kingdom. In that case, the British Financial Conduct Authority said “State Street UK’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected.”
The UK authorities said State Street overcharged six pension and investment clients $20.2 million. The case involved State Street’s transition management business, which helps institutional clients shift money when they fire and hire outside managers or liquidate portfolios.
State Street spokeswoman Carolyn Cichon said the employees had been terminated by the company several years ago. She said State Street has been cooperating with US authorities for the past few years.
“Since 2011 we have significantly strengthened our controls and reporting mechanisms within this business,’’ Cichon said.
McLellan pleaded not guilty Tuesday in US District Court in Boston and was released on $250,000 bond secured by his home. His lawyer, Marty Weinberg, in a statement said, “The evidence will ultimately and compellingly show that Ross McLellan committed no criminal acts and had no criminal intent.”
He also said the alleged behavior — charging clients “markups” on bond trades — is common, and that the profits were received by State Street, not McLellan.
McLellan has been running a Hingham firm called Harbor Analytics since 2012, according to his LinkedIn page. The Massachusetts state pension fund had hired him to evaluate some of its trading costs, paying him about $25,000 for the service, spokesman Eric Convey said.
“We suspended the relationship today,” Convey said.
A lawyer for Pennings could not be identified.
The charges are the latest in a series of employee conduct and oversight problems at State Street, which manages $2 trillion in client funds and provides administrative services on $28 trilllion in assets for pensions and mutual funds.
The company recently has been embroiled in cases related to financing a political campaign in Ohio in exchange for pension servicing business; overcharging clients for administrative services over 18 years, and overcharging for foreign exchange trading services.
Timothy Smith of Walden Asset Management in Boston, a $3 billion money manager and longtime State Street shareholder, said the question is whether these are one-off issues or part of a broader compliance problem.
“What we as investors expect for situations like this, is that they probe deeply into these situations, they learn what caused the problem,’’ Smith said. “Was it just a rogue individual or is it a pattern?”
State Street shares fell 2 percent to $57.61 on a generally down day for stocks.
According to the complaint, the former State Street executives asked traders to charge commissions on client trades and later instructed them to hide the fees. In a telephone call in March 2010, prosecutors alleged, Pennings instructed an employee not to discuss plans to hide commissions “because it’s not going to help our story.”
The securities fraud investigation is ongoing and is being conducted by the Federal Bureau of Investigation. Other State Street employees allegedly were aware of or involved in the UK commission scheme, according to the complaint.
The company itself also remains part of the US inquiry, according to an official with knowledge of the situation. The Securities and Exchange Commission, City of London Police, and other authorities are involved.