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U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23540 / May 13, 2016

Securities and Exchange Commission v. Ross McLellan, Civil Action No. 16-cv-10874 (D. Mass. filed May 13, 2016)

SEC Charges Former Executive of Massachusetts-Based State Street Corporation with Defrauding Investors

The Securities and Exchange Commission today announced fraud charges against Ross McLellan, a former executive of Massachusetts-based State Street Corporation, for engaging in a scheme to defraud investors who were customers of State Street's Transition Management line of business.

According to the SEC's complaint filed in federal court in Boston, Massachusetts, State Street Corporation, a publicly-traded financial holding company based in Boston, and its affiliates provide transition management services, which are offered to large investment clients such as pension funds or endowments who need to buy and sell large quantities of securities when the client may be changing fund managers or investment strategies. The SEC alleges that McLellan defrauded State Street Transition Management customers by charging hidden and unauthorized mark-ups (or amounts added to the cost of the service) on trading in U.S. and European securities.

According to the SEC's complaint:

  • McLellan, along with co-schemers, developed and orchestrated a deliberate strategy to charge Transition Management customers hidden mark-ups on certain transactions. Among other things, State Street employees, under the supervision of McLellan, made misrepresentations concerning pricing in connection with certain transition engagements. These misrepresentations were made in a variety of communications to customers, including false trading statements, pre-trade estimates, and post-trade reporting.
     
  • When McLellan and co-schemers were ultimately confronted by a customer that had detected some of the hidden mark-ups, McLellan aided and abetted others at State Street who made materially false and misleading statements to that customer to conceal the scheme. Among other things, in or about August 2011, McLellan directed others at State Street to misleadingly characterize the hidden mark-ups as a "fat finger error" and as "inadvertent commissions."
     
  • In addition to identifying customers to overcharge, McLellan oversaw the practice of taking hidden mark-ups, and directed others at State Street to engage in fraudulent acts and practices in furtherance of the scheme.
     
  • By engaging in the misconduct directly, and by directing subordinates to mislead customers and/or conceal mark-ups as part of this scheme to defraud, McLellan and co-schemers generated approximately $20 million in additional revenue for State Street.

The SEC's complaint charges McLellan with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also charges McLellan with aiding and abetting violations by others at State Street of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC's Complaint seeks as relief a permanent injunction prohibiting future violations of these statutes, disgorgement of ill-gotten gains plus prejudgment interest, and civil monetary penalties.

On April 5, 2016, the U.S. Attorney's Office for the District of Massachusetts announced parallel criminal charges against McLellan and another individual not charged in the SEC's complaint. The United Kingdom's Financial Conduct Authority, on January 31, 2014, found that State Street deliberately overcharged six customers a total of $20,169,603 and imposed a financial penalty of £22,885,000.

The SEC's continuing investigation is being conducted by Eric Heining, Benjamin Mack and Rory Alex of the Boston Office, with assistance from Mark Gera of the SEC's National Examination Program. The SEC's litigation will be led by Rua Kelly. The case is being supervised by Paul Block. The SEC appreciates the assistance of the U.S. Attorney's Office for the District of Massachusetts, the Fraud Section of the U.S. Department of Justice, the Federal Bureau of Investigation, the United Kingdom's Financial Conduct Authority and the City of London Police.

SEC Complaint

 

http://www.sec.gov/litigation/litreleases/2016/lr23540.htm


Modified: 05/13/2016