State Street to pay $115M in overcharge case
State Street Corporation, Boston, Massachusetts, has entered into a deferred prosecution agreement and agreed to pay a $115 million criminal penalty to resolve charges that it engaged in a scheme to defraud a number of the bank’s clients by secretly overcharging for expenses related to the bank’s custody of client assets, according to a May 13 press release from the U.S. Attorney's Office for the District of Massachusetts. The agreement was in connection with a criminal information charging the company with one count of conspiracy to commit wire fraud.
According to State Street’s admissions, between 1998 and 2015, bank executives conspired to add secret markups to “out-of-pocket” (OOP) expenses charged to the bank’s clients while letting clients believe that State Street was billing OOP expenses as pass-through charges on which the bank was not earning a profit. These markups were charged on top of fees that the clients had agreed to pay the bank, and despite written agreements that caused clients to believe the expenses would be passed through to them without a mark-up. State Street executives also took steps to conceal the mark-ups from clients, including by not disclosing the details underlying OOP expenses on invoices and by misleading clients when they inquired about what they were being charged for OOP-related activities. Through this scheme, State Street defrauded its clients out of more than $290 million.
State Street also agreed to fully reimburse the victims of the overcharges, and the Deferred Prosecution Agreement states that State Street had paid disgorgement, prejudgment interest, and a civil monetary penalty in connection with a settlement with the United States Securities and Exchange Commission in the amount of approximately $88 million, and paid civil penalties to state regulators in the amount of $8.575 million.