State Street Senior Managing Director Convicted of Securities Fraud

The former Senior Managing Director and Global Head of State Street Corporation’s Transition Management line was found guilty by a jury of conspiracy and securities fraud. U.S. v. McLellan, No. 1:16-cr-10094 (D. Mass.). Defendant Ross McLellan was found guilty of one count of conspiracy to commit securities fraud and wire fraud, two counts of securities fraud and two counts of wire fraud.

The charges stem from a scheme to defraud clients in the bank’s transition management business, conducted for institutional clients transitioning or liquidating a portfolio, according to papers in the criminal and parallel SEC civil action. From early 2010, through the fall of 2011, State Street offered transition services to customers in the U.S. and elsewhere. State Street claimed to offer a unique transition model that was conflict free and in which it acted as a fiduciary. Potential customers were informed that the institution followed the best practices code. It set forth principles relating to disclosure and remuneration. Specifically, the bank represented that the transition manager would not apply commissions or charges, adjust prices or apply mark-ups other than as agreed with the client in the contracting documents.

State Street typically charged a commission when trading equities and a mark-up on trades in fixed income instruments in the transition services segment. In some instances a fee was charged. The compensation was disclosed to customers in key contractual documents provide by State Street.

In 2010 State Street began to experience a shortage of major transition management deals. That impacted the financial performance of the business segment. From February 2010 through September 2011 Mr. McLellan, along with others, charged hidden mark-ups to transition management customers to generate additional revenue. Mr. McLellan also gave specific instructions to keep the additional charges hidden. During the period additional charges were added to the transition for six different clients.

The jury deliberated five hours before returning verdicts of guilty on five of six counts. Previously two other State Street employees pleaded guilty to participating in the scheme. See also SEC v. McLellan, Civil Action No. 1:16-cv-10874 (D. Mass. Filed May 13, 2016). The U.K.’s Financial Conduct Authority found that State Street deliberately overcharged six customers $20,169,602 and imposed a financial penalty of £22,885,000.

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