On September 7, 2017, the Securities and Exchange Commission announced that State Street had agreed to pay more than $35 million to settle charges previously brought by the SEC. The company was accused of fraudulently charging secret markups for transition management services. They were also accused of omitting material information about the way it operated its platform for trading United States Treasury securities.
The SEC order claimed that State Street’s scheme to overcharge transition management customers generated roughly $20 million in improper revenue. It is alleged that State Street relied on false trading statements, pre-trade estimates and post-trade reports to misrepresent compensation on transactions. The SEC claims that one customer eventually detected the hidden markups and confronted State Street. It is alleged that employees with State Street called the markups a “fat finger error” and “inadvertent commissions”.
An additional SEC order finds that State Street failed to make subscribers aware that its government securities trading platform, GovEx, was not necessarily “fair and transparent”, since it provided a single subscriber with a “Last Look” trading function, allowing them a short period to reject a match to a submitted quote. In return, that subscriber used the Last Look feature 57 times to block matches with $1 million in face value.
State Street apparently did not make the other parties aware that their orders were rejected using the Last Look feature. During the development of Last Look, it is alleged that State Street told one subscriber that they did not have this functionality at all. State Street Bank and Trust Company has agreed to pay a $3 million penalty, without admitting or denying guilt.
Meanwhile, State Street Global Markets LLC, State Street Global Advisors Funds Distributors LLC, and State Street Bank and Trust Company have agreed to pay a $32.3 million penalty to settle fraud charges for the alleged hidden transition services markups.