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Ex-State Street transitions chief convicted of fraud

A former State Street executive has been convicted of defrauding clients of the firm’s transition management business by a US court.

Ross McLellan, who worked as head of State Street’s transition management until his departure in October 2011, was convicted by a jury in Boston, Massachusetts of one count of conspiracy to commit securities fraud and wire fraud, two counts of securities fraud and two counts of wire fraud – the latter of which refers to the use of telecommunication equipment.

In a statement, the US Department of Justice (DoJ) detailed how McLellan, along with two other colleagues, conspired to “add secret commissions to fixed income and equity trades” related to transition management mandates undertaken for six institutional clients.

The Securities and Exchange Commission (SEC), the US financial regulator, said last year that the overcharging scheme netted State Street roughly $20m (€17m) in “improper revenue”.

Harold Shaw, the FBI agent who led the investigation, said: “Motivated by sheer greed… McLellan devised an elaborate bait-and-switch scheme to defraud State Street’s clients out of millions of dollars, and now he’s finally being held accountable for his actions.

“This case should serve as a warning to others, the FBI and our law enforcement partners will aggressively pursue and bring to justice those who undermine our financial markets.”

McLellan will be sentenced in October, the DoJ said. 

How the scandal unfolded

Between February 2010 and September 2011, the court heard, McLellan and two staff reporting to him – Edward Pennings and Richard Boomgaardt – added hidden mark-ups to trades carried out on behalf of several clients.

“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,” the DoJ said. 

Evidence heard at McLellan’s trial, cited by the DoJ, included a March 2010 phone call, during which Pennings told Boomgaardt not to talk about the mark-ups on one transaction “with anyone… because it’s not going to help our story. Don’t even share it with the rest of the team, to be honest.”

The DoJ also stated that, in June 2010, “McLellan and Boomgaardt requested that the bank’s traders provide them with the reported daily high and low prices of securities the bank had traded for the client so that they could determine the amount of the commissions to be applied to each security without attracting the client’s attention”.

“McLellan and Pennings sought to mislead the bank’s compliance staff into believing that the commissions had been charged in error and that the amount of the overcharges was limited to the commissions applied on US securities,” the DoJ said.

Ireland’s National Treasury Management Agency was repaid €2.65m by State Street in 2012 after the Irish sovereign wealth fund raised concerns over its transition management charges. The Kuwait Investment Authority and the Royal Mail Pension Plan are also understood to be among those affected.

The trio of staff left State Street in 2011. McLellan and Pennings were charged by the FBI and the SEC in 2016.

Pennings and Boomgaardt are due to be sentenced next month. Pennings pleaded guilty to one count of conspiring to commit wire fraud and securities fraud in June 2017, while Boomgaardt pleaded guilty in July 2017 to one count of conspiracy to commit securities fraud and wire fraud.

State Street was fined £22.9m by the UK’s Financial Conduct Authority in 2014. The company reached a $30m settlement with the SEC in 2017.

State Street said in a statement: “We deeply regret that this occurred, accept responsibility for the actions of our former employees, and since the overcharging was discovered have substantially enhanced our controls. We are fully cooperating with the United States Attorney’s Office for the District of Massachusetts and the Department of Justice in connection with this matter.”

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