Former State Street Executive Sentenced for Scheme to Defraud Clients through Secret Trading Commissions

A former executive vice president of State Street Corporation was sentenced today in federal court in Boston, Massachusetts, 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. 

Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, U.S. Attorney Andrew E. Lelling for the District of Massachusetts, and Special Agent in Charge Harold H. Shaw of the FBI’s Boston Field Office, made the announcement.

Ross McLellan, 47, of Hingham, Massachusetts, was sentenced by U.S. District Court Judge Leo T. Sorokin to 18 months in prison and two years of supervised release. In June 2018, McLellan was convicted by a federal jury of one count of conspiring to commit securities fraud and wire fraud, two counts of securities fraud and two counts of wire fraud.

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 unit, and 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, were indicted. In June 2017, Pennings pleaded guilty and is scheduled to be sentenced on Nov. 6.  Also in June 2017, Richard Boomgaardt, 44, of Sevenoaks, England, a former managing director of State Street, was charged separately and pleaded guilty in July 2017 to one count of conspiracy to commit securities fraud and wire fraud.  Boomgaardt was sentenced in July 2018 to one year of probation.

According to the evidence presented at trial, between February 2010 and September 2011, McLellan, Pennings, and Boomgaardt 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 that the clients had agreed to pay to 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.  For example, 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.” 

The evidence at trial demonstrated 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 that 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.

The evidence at trial further showed that, 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 case was investigated by the FBI.  Valuable assistance was provided by the Securities & Exchange Commission and the Justice Department’s Office of International Affairs.

Trial Attorney William Johnston of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Stephen E. Frank of the District of Massachusetts prosecuted the case.

Go to Source
Author: October 16, 2018