State Street Will Pay $64.6 Million, Name Monitor After Fraudby
U.S. attorney says State Street charged secret commissions
Bank boosts spending on compliance, audit and risk management
State Street Corp. agreed to pay $64.6 million and cooperate in the U.S. prosecution of former executives, while admitting it overcharged six clients in Europe, Africa and the Middle East. The Boston-based bank also agreed to appoint a compliance monitor.
The U.S. charged the firm on Wednesday with conspiracy to commit wire fraud and securities fraud but will defer the case and drop it after three years if the company makes promised reforms. The bank agreed to pay a criminal penalty of $32.3 million and to pay the same amount to settle a U.S. Securities and Exchange Commission civil case.
State Street defrauded clients by secretly applying commissions to billions of dollars in securities trades, the Justice Department said in a statement.
“State Street engaged in a concerted effort to fleece its clients by secretly charging unwarranted commissions,” William Weinreb, the acting U.S. attorney in Massachusetts, said in the statement. “Banks that defraud their clients in this way must be held accountable, no matter how big they are.”
In April, prosecutors announced charges against two former executives, Ross McLellan and Edward Pennings. They are accused of conspiring from February 2010 to September 2011 to place commissions on fixed-income and equity trades for six clients of the bank’s transition management business. That unit helped institutional clients move investments among asset managers and liquidate large portfolios.
In its deferred-prosecution agreement, State Street said it would use its “best efforts” to make current and former employees available for interviews or testimony in U.S. grand juries or trials, and with foreign or domestic regulatory or law-enforcement authorities.
“State Street deeply regrets this matter and accepts responsibility for the actions of its former employees,” the company said in a statement. The company said it reimbursed the six clients involved, fired the responsible employees and implemented stronger controls.
Spending on compliance, audit and risk management has increased by 78 percent in the last five years to $300 million in 2016, spokeswoman Anne McNally said in an interview.
In the settlement agreement, prosecutors said the company faced a fine ranging from $78.2 million to $156.4 million but received credit for its “extensive remedial measures,” enhancing controls in its transition management business and setting up an Office of Culture, Controls and Governance in the U.K. In 2014, the bank paid a penalty of 22.9 million pounds ($28.1 million) to the U.K.’s Financial Conduct Authority.
Prosecutors said the bank’s full cooperation didn’t begin immediately and “inadequacies in its initial internal investigation prevented it from being able to timely disclose all relevant facts.”
McLellan and Pennings have pleaded not guilty and face a trial on Oct. 23. 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.
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.
The case is U.S. v. McLellan, 16-cr-10094, U.S. District Court, District of Massachusetts (Boston).