SEC, FINRA Enforcement: State Street to Pay $12M Over Pay-to-Play Violations

Among recent enforcement actions by the Securities and Exchange Commission were charges against 11 bank officers and directors for fraud. State Street also agreed to pay the SEC over pay-to-play violations.

In addition, the Financial Industry Regulatory Authority censured and fined BNP Paribas for deficiencies in its large option position reporting system and position limit, and Citadel Securities on written supervisory procedure failures.

State Street Pays $12M for Pay-to-Play Violations

State Street Bank and Trust Co. agreed to pay $12 million to settle SEC charges that it conducted a pay-to-play scheme through its then-senior vice president and a hired lobbyist to win contracts to service Ohio pension funds.

An SEC investigation found that Vincent DeBaggis, who headed State Street’s public funds group responsible for serving as custodians or sub-custodians to public retirement funds, entered into an agreement with Ohio’s then-deputy treasurer to make illicit cash payments and political campaign contributions. 

In exchange, State Street received three lucrative sub-custodian contracts to safeguard certain funds’ investment assets and effect the settlement of their securities transactions. 

DeBaggis agreed to settle the SEC’s charges by paying $174,202.81 in disgorgement and prejudgment interest and a $100,000 penalty. 

“Pension fund contracts cannot be obtained on the basis of illicit political contributions and improper payoffs,” said Andrew Ceresney, director of the SEC’s Enforcement Division. “DeBaggis corruptly influenced the steering of pension fund custody contracts to State Street through bribes and campaign donations.” 

The SEC further alleges that Robert Crowe, a law firm partner who worked as a fundraiser and lobbyist for State Street, participated in the scheme and entered into undisclosed arrangements with the then-deputy treasurer to make secret illegal campaign contributions to obtain and retain business awarded to State Street.

The SEC filed a complaint against Crowe on Thursday in U.S. District Court for the Southern District of Ohio.

“Our complaint alleges that Crowe served as a conduit for corrupt payments from State Street to influence decisions about public pension fund service contracts,” said David Glockner, Director of the SEC’s Chicago Regional Office. “Pay-to-play schemes are intolerable, and lobbyists and their clients should understand that the SEC will be aggressive in holding participants accountable.”

11 Officers, Directors of Failed Bank Hid Bad Loans: SEC

The SEC has filed fraud charges against 11 former executives and board members at Birmingham, Alabama-based Superior Bank and its holding company who were involved in various schemes to conceal the extent of loan losses as the bank was faltering in the wake of the financial crisis.

According to the agency, those charged worked to mislead investors and bank regulators by propping up the bank’s financial condition, using straw borrowers, phony appraisals and insider deals. The fraud involved many of the largest loans in Superior Bank’s portfolio, and the group’s tactics included the improper extension, renewal and rollover of bad loans to avoid impairment and the need to report allowances for mounting loan and lease losses in the bank’s financial accounting.

Among the tactics they used were the issuance of nonrecourse loans, which replaced borrowers of record for severely delinquent loans with alternative borrowers who in general were already in default on multiple other loans with the bank. The alternative borrowers accepted the new loans, knowing that they would thus not be on the hook for repayment of the new loans and could also avoid foreclosure or collection efforts on their prior loans.

The 11 also used years-out-of-date appraisals that were wildly inaccurate, or used appraisers who were under obligation either to the bank or to the borrower. In approving renewals or modifications of severely delinquent loans, they either rolled forward relevant payment dates or funded new loans to the borrower, using those proceeds to pay down the prior loan.

They also proposed, structured, and documented nonrecourse joint venture agreements with defaulted borrowers and a now-deceased outside director of Superior Bancorp that made the loan look current despite almost certain new delinquency or default, thus making it look as if Superior Bank was in a better position.

As a result, Superior Bank overstated its net income in public filings by approximately 99% for 2009 and 50% for 2010. The bank failed in 2011.