STT State Street Corporation

Federal prosecutors have charged two former senior executives at State Street Corp. with running a scheme to defraud clients by secretly charging commissions on billions of dollars in securities trades.

The March 31 indictment, unsealed Tuesday, charges Ross McLellan, formerly president of the bank's U.S. broker-dealer unit, and Edward Pennings, who worked in the bank's London office, with securities and wire fraud. It alleges they secretly overcharged at least six clients, including Irish and British government pension funds and a Middle Eastern sovereign-wealth fund.

"The secret conversations and backroom plotting laid bare in today's charges paint a vivid picture of a brazen fraud," said Carmen M. Ortiz, U.S. attorney for Massachusetts, in a statement accusing the men of reaping millions of dollars in profits from the scheme, said to have run from February 2010 through September 2011.

Prosecutors didn't name State Street in the indictment, referring to it as a Boston-based financial services company and "one of the world's largest asset managers and custody banks."

A State Street senior vice president, Carolyn Cichon, confirmed that the indictment relates to former employees "who were separated from State Street several years ago," and that it involves the same matter that resulted in an earlier settlement with British regulators.

The U.K. Financial Conduct Authority in 2014 fined State Street's U.K. unit £ 22.9 million ($32.4 million) for overcharging clients. "Since 2011 we have significantly strengthened our controls and reporting mechanisms within this business," Ms. Cichon said in a statement.

Martin G. Weinberg, a lawyer for Mr. McLellan, who was arrested Tuesday in Hingham, Mass., said in a statement that his client did not commit any crimes and called the charges "an overreaction to past failures to control practices on Wall Street."

Mr. Weinberg added, "Every major bank charges its clients markups on its bond transactions in order to generate profits. And every dollar that is at issue in today's charge was received not by Mr. McLellan, but by the bank for which he worked."

Neither Mr. Pennings nor any representative for him could be immediately reached. Prosecutors said they believe Mr. Pennings, who reported to Mr. McLellan while at State Street, is living abroad.

Prosecutors allege that Messrs. McLellan and Pennings charged trading commissions on top of the fees that clients had agreed to pay the bank, and despite written instructions to the bank's traders that clients were not to be charged trading commissions.

The indictment quoted a December 2010 email from Mr. Pennings to Mr. McLellan, regarding a bid for business from a Dublin-based public pension fund, as saying, "Gotta win this one! Any ideas how to get more revenue would be appreciated…My tax dollars are after all paying for their reckless spending."

When a London-based pension fund in June 2011 asked about some charges, the men tried to mislead both the client and the bank's compliance staff, the indictment said.

(END) Dow Jones Newswires

April 05, 2016 15:25 ET (19:25 GMT)

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