Federal prosecutors are charging Ross McClellan and Edward Pennings with securities fraud and wire fraud. McLellan was formerly with State Street Corp.’s (STT) brokerage firm unit in the US and Pennings worked for the bank in London. According to the government, the two men secretly charged six clients excess commissions for billions of dollars of securities trades. The clients included government pension funds in Britain and Ireland and a sovereign-wealth fund in the Middle East.
The two former State Street executives allegedly charged clients the trading commissions in addition to the fees that the latter had already agreed to pay and even though they specifically were not supposed to charge them commissions. The men purportedly ran their scam from 2/10 through 9/11, allegedly making millions of dollars in the process.
Although State Street wasn’t officially named in the criminal indictment, The Wall Street Journal reports that the firm’s senior vice president, Carolyn Cichon, verified that two of the bank’s former employees were involved in the matter. It was in 2014 that the U.K. Financial Conduct Authority fined State Street’s unit in that country $32.4M for charging clients $20.2M in excess commissions.
The FCA said that between ’10 and ’11, about half a dozen clients were charged big markups and undisclosed commissions for help they sought to restructure investment portfolios. State Street has settled those changes. Cichon said that since then, the firm has made significant changes to enhance controls and reporting mechanisms.
Meantime, McCLellan’s lawyer maintains that his client didn’t commit any crimes. McClellan has been arrested. Pennings lives abroad.
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Two Former State Street Executives Indicted on Fraud Charges, The Wall Street Journal, April 5, 2016
State Street UK fined £22.9m by Financial Conduct Authority for Transitions Management failings, Financial Conduct Authority, March 1, 2016