Two Former State Street Executives to Plead Guilty in Institutional Investor Fraud Involving Billions of Dollars of Trades

Two of the three ex-State Street Corp.(STT) executives whom US prosecutors have charged with bilking six clients via secret commissions on billions of dollars of trades have agreed to plead guilty. Edward Penning, a former State Street Sr. managing director, and Richard Boomgaardt, the former head of the transition management desk for Africa, Europe, and the Middle East, will plead guilty to securities fraud and conspiring to commit wire fraud. Ex-State Street EVP Ross McLellan, who has pleaded not guilty to the criminal charges against him, is scheduled to go on trial later this year.

State Street is a custody bank based in Boston. Its unit that was involved in the securities fraud assists institutional clients in moving investments and liquidating big portfolios.

Penning, Boomgaardt, and McLellan were charged last year in a US probe. Earlier this year, State Street agreed to settle related criminal and civil probes over the men’s alleged misconduct for $64.6M. That’s a $32.3M criminal penalty to the US Justice Department and a $32.3M civil settlement to resolve the US Securities and Exchange Commission’s case. As part of the settlement, the firm admitted that it overcharged six clients of State Street’s transition management business by secretly billing them commissions on billions of dollars in securities trades, including equity trades and fixed-income trades. In 2014, State Street also paid a $38M fine to the UK Financial Conduct Authority for charging the same clients mark-ups for certain transactions.

While the bank made millions of dollars in “ill-gotten profits,” said the US Department of Justice, the investors who were bilked suffered “very real financial losses.” The commissions were in addition to fees that the investors already had agreed to pay State Street and even though traders were instructed in writing not to charge these investors commission for trading. Instead, the bank’s employees are accused of purposely hiding the commissions from the investors, including misrepresenting its performance to one of them to conceal a trading loss.

It was just last year that State Street consented to pay $382.4M in a global settlement to resolve claims that it misled mutual funds and custody clients through hidden markups that were added to foreign currency exchange trades. According to an SEC probe, the bank made substantial revenue by misleading clients about indirect foreign currency exchange trading and claiming to provide the “most competitive rates available,” as well as “best execution” and “market rates” on transactions. Instead, said the regulator, State Street used “predetermined, uniform markups” to establish set prices rather than try to get custody clients the best prices.

To resolve the claims, State Street agreed to pay $167M in penalties and disgorgement too the SEC, $155M to the DOJ, and at least $60M to ERISA plan clients as part of a deal arrived at with the US Labor Department.

Institutional Investor Fraud Cases
Even if prosecutors and regulators are involved in pursuing claims against the financial firm or representative who caused you harm, it is important that you have your own securities attorney advocating on your behalf for the financial recovery that you are owed. The SSEK Partners Group is an institutional investor fraud law firm. Contact one of our securities fraud lawyers today to schedule your free case consultation. We represent high net worth individual investors and different kinds of institutions in helping them try to recoup their fraud losses.

Second ex-State Street exec to plead guilty in U.S. fraud probe, Reuters, June 8, 2017

State Street Corporation Agrees to Pay More than $64 Million to Resolve Fraud Charges, Justice.gov, January 18, 2017

State Street to Pay Over $64M to Settle US Probes Over Secret Fees Charged to Institutional Clients, Institutional Investor Securities Blog, January 20, 2017