Photographer: Scott Eisen/Bloomberg

Bankers Charged With Plot to Jack Up Trading Commissions at State Street

  • U.S. accuses Ross McLellan, Edward Pennings of `brazen fraud'
  • Indictment cites e-mails, conversations, `backroom plotting'

Two former executives at State Street Corp. were indicted in what the U.S. Justice Department said was a “brazen fraud” involving secret commissions applied to billions of dollars in securities trades.

Ross McLellan, 44, and Edward Pennings, 45, conspired from February 2010 to September 2011 to place commissions on fixed-income and equity trades for at least six clients of the bank’s transition management business, according to U.S. Attorney Carmen Ortiz in Boston. That unit helped institutional clients move investments among asset managers and liquidate large portfolios.

“The secret conversations and backroom plotting laid bare in today’s charges paint a vivid picture of a brazen fraud,” Ortiz said Tuesday in a statement. The men “plotted to overcharge their clients by millions of dollars, and to hide their tracks.”

The defrauded clients included an Irish government pension fund, a British government pension fund and a Middle East sovereign wealth fund, according to the indictment. 

Both men are charged with conspiracy, securities fraud and wire fraud. McLellan, of Hingham, Massachusetts, pleaded not guilty Tuesday in federal court in Boston and a magistrate judge set bail at $250,000 secured by his home as collateral. He had shackles on his ankles and wore jeans and a faded long-sleeved T-shirt with an image on the back of a big smiling whale. Pennings is believed to be living abroad, according to Ortiz’s statement.

U.K. Unit

McLellan and Pennings “were separated from State Street several years ago,” a bank spokeswoman, Julie Kane, said in an e-mail. The indictment relates to the same six clients for which State Street’s U.K. unit was fined 22.9 million pounds ($32.4 million) by the Financial Conduct Authority in January 2014, Kane said. The FCA said the bank charged clients “substantial” markups without their consent.

State Street has cooperated with U.S. authorities for several years and “significantly strengthened” its controls and reporting mechanism, Kane said.

“The evidence will ultimately and compellingly show that Ross McLellan committed no criminal acts and had no criminal intent,” his attorney, Martin G. Weinberg, said in a statement. “Every major bank charges its clients markups on its bond transactions in order to generate profits. And every dollar that is at issue in today’s charge was received not by Mr. McLellan, but by the bank for which he worked.”

Weinberg called the indictment “an overreaction to past failures to control practices on Wall Street.” He said McLellan will “mount a full and successful defense.”

McLellan founded Harbor Analytics, according to the firm’s website, which describes him as a former executive vice president for State Street Global Markets. Prosecutors said in the indictment he was president of the bank’s U.S. broker-dealer subsidiary. 

Pennings, who reported to McLellan, worked in the London office as a senior managing director and head of the bank’s portfolio solutions group for Europe, the Middle East and Africa, according to the indictment.

Fraud Charges

The indictment cites numerous snippets of conversations in which McLellan and Pennings allegedly discussed plans to charge hidden commissions.

On March 2, 2010, Pennings told an unidentified co-conspirator not to discuss the fees with anyone “because it’s not going to help our story,” according to the indictment. “Don’t even share it with the rest of the team, to be honest.”

In June 2011, a client asked if it had been charged commissions beyond what it agreed to pay, according to the U.S. Pennings initially denied any commissions were charged, and later said at McLellan’s behest they were “inadvertently” placed on securities in the U.S., prosecutors said. In fact, the charges were intentional and involved U.S. and European securities, Ortiz said.

Compliance Staff

The two men also sought to mislead the bank’s compliance staff into believing that the commissions were charged in error and were limited to U.S. securities, Ortiz said.

State Street has run afoul of regulators in recent years. At the time of the 2014 settlement, the FCA said State Street “developed and executed a deliberate strategy” to charge undisclosed fees on top of agreed management or commission payments at a unit that helps institutions restructure their investments.

State Street is a custody bank, keeping records, tracking performance and lending securities for institutional investors including mutual funds, pension funds and hedge funds. It is also one of the largest providers of exchange-traded funds globally and manages investments for individuals and institutions.

State Street in recent years has faced regulatory probes on matters including foreign-exchange trading and soliciting business from public pension plans.

Enforcement Action

The firm has said it expected to face an enforcement action after failing to comply with the Bank Secrecy Act, anti-money laundering rules and U.S. economic sanctions. It agreed in January to pay $12 million to settle U.S. Securities and Exchange Commission claims that a former senior vice president helped route illicit cash payments and political contributions to win business from Ohio pension funds. State Street didn’t admit or deny the SEC’s findings.

The case is U.S. v. McLellan, 16-cr-10094, U.S. District Court, District of Massachusetts (Boston).

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