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September 07, 2017 at 12:08 PM
The Securities and Exchange Commission 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.
An SEC order finds 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, according to the SEC.
“Agreeing to a fee arrangement and then secretly tucking in hidden, unauthorized markups is fraudulent mistreatment of customers,” said Paul Levenson, director of the SEC’s Boston Regional Office, which investigated the overcharges.
State Street Global Markets LLC, State Street Global Advisors Funds Distributors LLC, and State Street Bank and Trust Co. agreed to pay a $32.3 million penalty to settle the fraud charges for the hidden transition services markups.
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, and State Street did not inform the counterparties 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.
“Firms that run trading platforms cannot mislead subscribers about their order handling operations,” said Kathryn A. Pyszka, associate director of the SEC’s Chicago Regional Office that investigated the GovEx-related disclosure failures.
State Street Bank and Trust agreed to pay a $3 million penalty without admitting or denying the findings that its GovEx-related disclosure failures violated the Securities Act of 1933.
Advisor Charged With Stealing $1M From Clients to Go Gambling
The SEC charged a New Jersey-based tax preparer and investment advisor with stealing more than $1 million from clients to support his gambling habit and other personal expenditures.
According to the SEC’s complaint, Scott Newsholme of Farmingdale, New Jersey, fabricated account statements, doctored stock certificates, and forged promissory notes as part of a scheme in which he convinced clients seeking his financial planning advice to give him their money to invest in various securities.
Instead of investing clients’ money, Newsholme allegedly cashed their investment checks at a check-cashing store and pocketed the funds while assuring clients that their assets were safe and flourishing.
According to the SEC, Newsholme used investor money for personal expenses, gambling in Atlantic City, and Ponzi-like payments to clients who sought a return of their funds.
”As alleged in our complaint, Newsholme repaid his clients’ trust with betrayal,” Andrew Calamari, director of the SEC’s New York Regional Office, said in a statement.
The SEC’s complaint seeks the disgorgement of ill-gotten gains plus interest, penalties and permanent injunctions. In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Newsholme.
