State Street Corporation, Hidden Trading Commission Scheme, Massach…

BOSTON — State Street Corporation, the Boston-based financial giant, has agreed to pay more than $64 million to resolve federal criminal and civil charges stemming from a years-long scheme to defraud at least six institutional clients through hidden trading commissions. The bank admitted to secretly adding unauthorized fees to billions of dollars in fixed income and equity trades, violating client agreements and concealing the fraud through internal misrepresentation and deception.

Under the terms of a deferred prosecution agreement, State Street will pay a $32.3 million criminal penalty to the Department of Justice and offer an identical $32.3 million civil penalty to the Securities and Exchange Commission. The bank admitted in court filings that it systematically added secret commissions on top of agreed-upon fees for its transition management services — a business line designed to help large investors shift or liquidate portfolios — even though clients explicitly instructed no such commissions be charged.

The scheme, which spanned multiple years, involved deliberate concealment. Traders were instructed to hide the extra charges from clients, and the bank falsified performance reports for at least one client to cover up a significant trading loss. According to federal investigators, this wasn’t a case of accounting errors — it was a coordinated effort to exploit trust and generate millions in illicit profits.

Two former top executives, Ross McLellan, former Executive Vice President, and Edward Pennings, former Senior Managing Director, were indicted in April 2016 on charges of conspiracy, securities fraud, and wire fraud. They are set to stand trial in October 2017 before U.S. District Court Judge Leo T. Sorokin. The government’s case hinges on internal communications and trading records showing a pattern of deception directed from senior levels.

“State Street cheated its customers by agreeing to charge one price for its services and then secretly charging them something else,” said Acting U.S. Attorney William D. Weinreb. “Banks that defraud their clients in this way must be held accountable, no matter how big they are.” Acting Assistant Attorney General David Bitkower added: “The bank fundamentally abused its clients’ trust and inflicted very real financial losses.”

As part of the resolution, State Street must retain an independent compliance monitor for three years, strengthen its internal controls, and continue cooperating with the Justice Department and foreign authorities, including the UK’s Financial Conduct Authority, which has already collected a substantial penalty. The case was handled by Assistant U.S. Attorney Stephen E. Frank and Trial Attorney Aisling O’Shea, with support from the FBI’s Boston Field Division and the SEC.

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