This securities class action is built on two other actions involving fraudulent charges to customers by State Street Corporation. The complaint alleges that the company violated the Securities Exchange Act of 1934 in publishing its revenues and liabilities, because the revenues included fraudulent charges, a liability the company would have to pay back when the truth emerged.
The class for this action is all persons and entities who acquired the publicly-traded securities of State Street between February 27, 2012 and January 18, 2017.
State Street Corporation’s subsidiaries offer financial products and services to institutional investors. The two other actions claim it defrauded customers in two areas.
Transition Management Fees and Commissions. Transition management is needed when large institutional investors want to get rid of complex holdings or illiquid assets. These trades must be done carefully, so as not to depress prices.
The complaint for United States v. State Street Corporation, 17-cr-10008, filed on January 18, 2017 notes that State Street’s transition management agreements cited specific fees or commissions, but alleges that the company took larger amounts and hid them from customers.
For example, that complaint claims the company agreed not to charge commissions to a Middle Eastern sovereign wealth fund; then it did, but hid them by claiming the trades were made at different times, when prices were different. With a Dutch pension fund, the complaint says, it agreed to charge 1 basis point commission, then charged 1.5 basis points.
SWIFT Message Fees. This involves the company’s custody and administrative services, for which it was entitled to charge for out-of-pocket fees, such as for Worldwide Interbank Financial Telecommunication (SWIFT) messages for secure financial communications.
On April 20, 2016, the Office of the Secretary of State of the Commonwealth of Massachusetts filed an Administrative Complaint alleging State Street had overcharged clients for SWIFT messages for the past eighteen years. The company generally charged clients $5 per message, that complaint claims, when in reality charges fell over time to only a few cents. It quotes e-mails from State Street’s own employees questioning these charges because they were so far out of line with real costs.
On January 31, 2014, Bloomberg published an article claiming that State Street’s UK entity had been fined $37.7 million for charging clients higher prices without their consent.
On December 17, 2015, the company filed a Form 8-K in which it announced a review of its charges, stating that a preliminary assessment had shown “$200 million or more of expenses may have been incorrectly invoiced.”
On January 18, 2017, the US Department of Justice announced that State Street had agreed to a deferred prosecution agreement to pay a $32.3 million criminal penalty, plus an equal amount to the Securities and Exchange Commission (SEC).
As these revelations emerged, the company’s stock fell.