Friday, June 29, 2018
Former State Street Executive Convicted in Scheme to Defraud Clients Through Secret Trading Commissions on Billions of Dollars of Securities Trades
A former executive vice president of State Street Bank & Trust was convicted by a federal jury in Boston in connection with engaging in a scheme to defraud at least six of the bank’s clients through secret commissions applied to billions of dollars of securities trades.
Acting Assistant Attorney General John P. Cronan of the Justice Department’s Criminal Division, U.S. Attorney Andrew E. Lelling of the District of Massachusetts and Special Agent in Charge Harold H. Shaw of the FBI’s Boston Field Division made the announcement.
After a three-week trial, Ross McLellan, 47, of Hingham, Massachusetts, was convicted of one count of conspiracy to commit securities fraud and wire fraud, two counts of securities fraud and two counts of wire fraud. U.S. District Court Judge Leo T. Sorokin of the District of Massachusetts, who presided over the trial, scheduled sentencing for Oct. 10.
“State Street’s clients, including institutional investors managing pensions for retirees, entrusted McLellan and his subordinates to transition billions of dollars in assets,” said Acting Assistant Attorney General John Cronan. “Rather than living up to the responsibility to act in their clients’ best interests, McLellan and his coconspirators stole from these victims by charging hidden commissions and then lying about the scheme to cover their tracks. This conviction is a testament to the dedication of the FBI and prosecutors in the Criminal Division and U.S. Attorney’s Office to protecting innocent investors by investigating and prosecuting complex financial crimes.”
“Mr. McLellan defrauded State Street clients, violating his fiduciary duties and abusing his clients’ trust along the way,” said U.S. Attorney Lelling. “With systematic precision, Mr. McLellan and his conspirators added secret commissions to securities trades and took steps to conceal the scheme. In doing so, beyond directly defrauding institutional investors, Mr. McLellan chipped away at the savings of thousands of retirees whose pensions he was supposed to safeguard. After only five hours of deliberations, a jury found Mr. McLellan guilty of five of six counts in the indictment.”
“Motivated by sheer greed, Mr. 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,” said FBI Special Agent in Charge Shaw. “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.”
In April 2016, McLellan, a former executive vice president of State Street who served as global head of its Portfolio Solutions Group and president of its U.S. broker-dealer, was indicted with Edward Pennings, 47, of Surrey, England, a former senior managing director of State Street and the head of its Portfolio Solutions Group for Europe, the Middle East and Africa.
As established by the evidence at trial, between February 2010 and September 2011, McLellan, Pennings and Richard Boomgaardt, 44, of Sevenoaks, England, a former managing director of 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 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. McLellan, Pennings and Boomgaardt took steps to hide the commissions from the clients and others within the bank, including by directing that the commissions not be broken out in post-trade reports.
- In a telephone call in March 2010, Pennings instructed Boomgaardt not to talk about the plans to charge hidden commissions 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.”
- 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.
- In March 2011, McLellan instructed a U.S. fixed income trader to charge a commission of one basis point (0.01 percent) of yield to each trade conducted for another client – notwithstanding that the written trading instructions for the transaction said to charge zero commissions – and subsequently instructed the trader to delete any reference to the commissions from the trading results he sent to the transition manager assigned to the project.
In June 2011, when one of the affected clients inquired about whether it had, in fact, been charged commissions in breach of its agreement with the bank, Pennings initially denied that any commissions had been charged. Later – at McLellan’s direction – Pennings acknowledged only that “inadvertent commissions” had been applied to securities traded in the United States, but did not disclose that they had, in fact, been intentionally charged in both the United States and in Europe. 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 U.S. securities, the evidence showed.
In June 2017, Pennings pleaded guilty and is scheduled to be sentenced on July 18. Boomgaardt was charged separately and pleaded guilty in July 2017 to one count of conspiracy to commit securities fraud and wire fraud. Boomgaardt is scheduled to be sentenced on July 31.
The case was investigated by the FBI. Trial Attorney William Johnston of the Criminal Division’s Fraud Section and Assistant U.S. Attorney/Economic Crimes Chief Stephen E. Frank of the District of Massachusetts are prosecuting the case. Valuable assistance was provided by the Securities & Exchange Commission and the Justice Department’s Office of International Affairs.