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From Securities Regulation Daily, April 5, 2016

Former State Street execs charged secret trading commissions

By Rodney F. Tonkovic, J.D.

The U.S. Attorney's Office for the District of Massachusetts has announced that two former executives of one of the world's largest custody banks have been charged with scheming to defraud at least six of the bank's clients. The executives charged secret commissions that were applied to billions of dollars in securities trades.

According to the government, Ross McLellan and Edward Pennings, both former senior executives of State Street Corporation, were charged in a five-count indictment with conspiring to commit securities fraud and wire fraud, as well as two counts each of securities fraud and wire fraud. McLellan served as an executive vice president and global head of State Street's Portfolio Solutions Group. Pennings, a UK resident, reported to McLellan and was head of the Portfolio Solutions Group for Europe, the Middle East, and Africa.

Between February 2010 and September 2011, McLellan and Pennings, along with others, allegedly conspired to add secret commissions to fixed income and equity trades performed for at least six clients of the bank's "transition management" business, including Irish and British government pension funds. The bank's clients were generally not charged trading commissions, but, despite this instruction, the secret commissions were charged on top of agreed-to fees. The conspirators then actively hid the commissions from the affected clients and took additional steps to cover up their actions.

U.S. Attorney Carmen M. Ortiz of the District of Massachusetts said: "The secret conversations and backroom plotting laid bare in today’s charges paint a vivid picture of a brazen fraud." Ortiz added that "With each trade, they chipped away at the savings of thousands of retirees whose pensions they were charged with safeguarding."

The scheme came to light in 2011 after one of the affected clients asked if it had been charged commissions in breach of its agreement with State Street. Pennings initially denied that commissions had been charged, but later, at McLellan's directions, acknowledged that some commissions had been "inadvertently" charged on securities traded in the U.S. McLellan and Pennings told State Street's compliance staff that the client had erroneously been charged a commission on U.S. trades, but did not disclose that commissions had also been applied to European trades.

MainStory: TopStory FraudManipulation MassachusettsNews

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