(Bloomberg) -- Two former executives at State Street Corp. were indicted in what the U.S. Justice Department said was a "brazen fraud" involving secret commissions applied to billions of dollars in securities trades.
Ross McLellan, 44, and Edward Pennings, 45, were charged with securities fraud, wire fraud and conspiracy in federal court in Boston. They worked for "one of the world's largest asset managers and custody banks," according to the indictment, which didn't identify their employer. State Street spokeswoman Anne McNally didn't immediately return calls and an e-mail seeking comment.
McLellan and Pennings conspired between February 2010 and September 2011 to add secret commissions to fixed income and equity trades done for at least six clients of the bank's transition management business, according to U.S. Attorney Carmen Ortiz in Boston. That unit helped institutional clients move investments among asset managers and liquidate large portfolios. Those commissions were charged on top of fees that clients already agreed to pay, prosecutors said.
"The secret conversations and backroom plotting laid bare in today's charges paint a vivid picture of a brazen fraud," Ortiz said Tuesday in a statement. The men "plotted to overcharge their clients by millions of dollars, and to hide their tracks."
BROKER-DEALER
McLellan, of Hingham, Massachusetts, founded Harbor Analytics, according to the firm's website, which said he was an executive vice president for State Street Global Markets. The indictment said he was president of the bank's U.S. broker-dealer subsidiary. McLellan is scheduled to appear in court Tuesday afternoon. His lawyer wasn't immediately identified.
Pennings, who reported to McLellan, worked in the London office as a senior managing director and head of the bank's portfolio solutions group for Europe, the Middle East and Africa, according to the indictment. He is believed to be living abroad, according to Ortiz's statement.
The defrauded clients included an Irish government pension fund, a British government pension fund and a Middle East sovereign wealth fund, according to the indictment.
State Street.'s U.K. unit was fined 22.9 million pounds ($32.4 million) by the Financial Conduct Authority in January 2014 for charging clients "substantial" mark-ups without their consent.
UNDISCLOSED FEES
State Street "developed and executed a deliberate strategy" to charge undisclosed fees on top of agreed management or commission payments at a unit that helps institutions restructure their investments, the FCA said at the time.
State Street is a custody bank, keeping records, tracking performance and lending securities for institutional investors including mutual funds, pension funds and hedge funds. It is also one of the largest providers of exchange-traded funds globally and manages investments for individuals and institutions.
State Street has in recent years faced regulatory probes on matters including foreign-exchange trading and soliciting business from public pension plans.
The firm has said it expected to face an enforcement action after failing to comply with the Bank Secrecy Act, anti-money laundering rules and U.S. economic sanctions. It agreed in January to pay $12 million to settle U.S. Securities and Exchange Commission claims that a former senior vice president helped route illicit cash payments and political contributions to win business from Ohio pension funds. State Street didn't admit or deny the SEC's findings.
The case is U.S. v. McLellan, 16-cr-10094, U.S. District Court, District of Massachusetts (Boston).
