News
Julia Irvine 8 Sep 2017 01:30pm

State Street’s shameful secret mark-ups

Global financial services giant State Street has paid out more than $35m (£26.5m) to the US Securities and Exchange Commission in part to settle fraud charges relating to secret mark-ups for transition management services

The payment brings the total amount State Street has paid out to the US authorities in civil and criminal penalties over the scandal to $64.6m.

According to the SEC, State Street used false trading statements, pre-trade estimates and post-trade reports to misrepresent its compensation on various deals, in particular purchases and sales of bonds and other securities that can be traded outside large transparent markets.

Six EMEA-based transition management clients serviced by State Street’s transition management business were charged amounts in excess of their contractual terms in 2010 and 2011. As a result, State Street generated around $20m in improper revenue.

“When one customer detected some hidden mark-ups and confronted State Street employees, they falsely called it a ‘fat finger error’ and ‘inadvertent commissions’ in order to conceal the scheme,” the SEC added.

Part of the fine ($3m) covers a separate SEC charge against State Street which relates to omission of material information about the operation of its platform for trading US securities.

The firm allowed one subscriber access to a “last look” trading functionality that enabled it to reject a match to a submitted quote. The subscriber went on to use last look to reject 57 matches, each with a face value of $1m.

The firm did not let the counterparties know that their orders had been rejected via last look. Indeed, the SEC alleges State Street lied to one subscriber, saying that the platform did not have a last look functionality at all.

In a statement about the settlement, State Street said, “We deeply regret that our clients were impacted and that a small number of our employees failed to meet our expectations.

“The impacted clients were fully reimbursed and over the past several years we have taken significant steps to strengthen our controls for our transition management business, and more broadly to enhance our compliance program, culture and operating environment.”

 The firm added that the settlement had brought to an end a number of governmental investigations arising out of the overcharging.

In 2014, the firm paid a financial penalty of £22.9m to the UK Financial Conduct Authority over the same charges.

Topics