State Street Corp. has agreed to pay more than $64 million to resolve the government’s criminal investigation into a scheme to defraud several of the bank’s clients through secret commissions applied to billions of dollars in securities trades.
State Street has entered into a deferred prosecution agreement and will pay a $32.3 million criminal penalty to the Department of Justice and an equal amount to the Securities and Exchange Commission as a civil penalty.
In April 2016, the government charged two former high-ranking State Street executives, former Executive Vice President Ross McLellan and former Senior Managing Director Edward Pennings, with conspiracy, securities fraud and wire fraud in connection with the same scheme. McLellan and Pennings are scheduled to go to trial before U.S. District Court Judge Leo T. Sorokin in October 2017.
Authorities said that State Street conspired to add secret commissions to fixed income and equity trades performed for at least six clients of the bank’s “transition management” business, which helps institutional clients move their investments between and among asset managers or liquidate large investment portfolios.
The justice department said the commissions were charged on top of fees the clients had agreed to pay the bank, and despite written instructions to the bank’s traders that generally reflected that the clients were not to be charged trading commissions. State Street also took steps to hide the commissions from clients and misrepresented its performance to one of these clients in order to conceal a trading loss.
In addition to the criminal and civil penalties, State Street also agreed to continue cooperating with the justice department and with foreign authorities in any ongoing investigations and prosecutions relating to the conduct, including of individuals; to enhance its compliance program; and to retain an independent corporate compliance monitor for three years.
The justice department said that State Street had already fully repaid the clients who lost money to the scheme and had also paid “a substantial penalty” to the UK Financial Conduct Authority.
