BOSTON (Reuters) - A former State Street Corp (STT.N) executive engaged in “bait-and switch” by promising to charge several of the bank’s clients low fees to execute billions of dollars of trades before secretly applying commissions to them, a U.S. prosecutor said on Monday.
Ross McLellan, a former executive vice president, sought to defraud customers including Kuwait’s sovereign wealth fund and European pension funds out of millions of dollars, prosecutor William Johnston told a federal jury in Boston.
In his closing argument following three weeks of trial, Johnston said the evidence showed McLellan from 2010 to 2011 directed employees to charge customers the hidden commissions in order to “secretly pick the pockets of State Street’s clients.”
He said that McLellan, with the help of two other executives who testified against him at trial, overcharged the customers despite the bank promising them low fees and to act in their best interest.
“At its the heart, it was one of the oldest and most basic frauds out there: bait-and-switch,” said Johnston, an attorney with the U.S. Justice Department.
But Martin Weinberg, McLellan’s lawyer, said his client never intended to defraud anyone and believed the mark-ups were allowed under the customers’ contracts.
He urged jurors to discredit the testimony of the prosecution’s star witnesses, Edward Pennings and Richard Boomgaardt, the two other State Street executives who pleaded guilty in 2017.
Weinberg said both men saw McLellan as their “ticket to freedom” as they had agreed to testify against him in hopes of leniency at sentencing, a fact that had “corrupted” their testimony in the securities fraud trial.
“If you don’t trust them, the government’s case falls,” Weinberg said.
The case followed a 2014 settlement between State Street and the UK Financial Conduct Authority in which the Boston-based bank paid a fine of 22.9 million pounds, or $38 million at the time, for charging six clients mark-ups on certain transactions.
In 2017, State Street agreed to pay $64.6 million to resolve related U.S. criminal and civil investigations and entered a deferred prosecution agreement.
The six clients included the Kuwait Investment Authority and Irish, British and Dutch pension funds.
All six utilized the bank’s “transition management” business, which helps institutional clients move their investments between asset managers or liquidate large investment portfolios.
Prosecutors said McLellan also defrauded a New York-based unit of insurance company AXA SA (AXAF.PA) by applying hidden fees to trades conducted on its behalf.