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State Street to pay $35M for disclosure failures

Jaclyn Jaeger | September 7, 2017

The Securities and Exchange Commission today announced that State Street has agreed to pay more than $35 million to settle charges that it fraudulently charged secret markups for transition management services and separately omitted material information about the operation of its platform for trading U.S. Treasury securities.

In the SEC order, the SEC found that State Street’s scheme to overcharge transition management customers generated approximately $20 million in improper revenue for the firm. State Street used false trading statements, pre-trade estimates, and post-trade reports to misrepresent its compensation on various transactions, especially purchases and sales of bonds and other securities that trade outside large transparent markets.

When one customer detected some hidden markups and confronted State Street employees, they falsely called it a “fat finger error” and “inadvertent commissions” in order to conceal the scheme. “Agreeing to a fee arrangement and then secretly tucking in hidden, unauthorized markups is fraudulent mistreatment of customers,” Paul Levenson, Director of the SEC’s Boston Regional Office that investigated the overcharges, said in a statement.

In a separate SEC order, the agency finds that State Street failed to inform subscribers to its government securities trading platform, called GovEx, that despite marketing the system as “fair and transparent” it provided one subscriber with a “Last Look” trading functionality that allowed a short period of time for the subscriber to reject a match to a submitted quote. 

The subscriber used Last Look to reject 57 matches that each had a $1 million face value. State Street did not inform the counter-parties that their orders had been rejected with Last Look. While developing Last Look, State Street even told one subscriber that the platform did not have Last Look functionality at all, the SEC said.

“Firms that run trading platforms cannot mislead subscribers about their order handling operations,” said Kathryn Pyszka, Associate Director of the SEC’s Chicago Regional Office that investigated the GovEx-related disclosure failures. 

State Street Bank and Trust Company agreed to pay a $3 million penalty without admitting or denying the findings that its GovEx-related disclosure failures violated Section 17(a)(2) of the Securities Act of 1933. State Street Global Markets, State Street Global Advisors Funds Distributors, and State Street Bank and Trust Company agreed to pay a $32.3 million penalty to settle the fraud charges for the hidden transition services markups.

State Street and certain foreign subsidiaries previously agreed to pay separate penalties to U.S. criminal authorities and the United Kingdom’s Financial Conduct Authority.