SEC v. Ross I. McLellan, No. 1:16-cv-10874, District of Massachusetts (June 20, 2024) — Complaint

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

SECURITIES AND EXCHANGE :
COMMISSION, :
 :
Plaintiff, :
 :
v. : Civil Action No.
 :
 :
ROSS I. MCLELLAN, : JURY TRIAL DEMANDED
 :
 :
Defendant. :

COMPLAINT

Plaintiff   Securities   and   Exchange   Commission   (the   “Commission”)   alleges   the
following against Defendant Ross I. McLellan (“McLellan”).
PRELIMINARY STATEMENT

1. From approximately February 2010 to September 2011, McLellan and others at
State  Street  Corporation  (“State  Street”)  schemed  to  defraud customers  of  State  Street’s
Transition Management line of business by charging those customers hidden and unauthorized
mark-ups  (or  amounts  added  to  the  cost  of  the  service)  on trading  in  U.S.  and  European
securities.    The hidden mark-up  scheme  by  McLellan  and  State  Street  Employees  A and B
(also  referenced  herein  as  the  “State  Street  Co-Schemers,”)  encompassed  transitions  carried
out   for   at   least   six   State   Street   customers,   who   were   collectively overcharged   by
approximately $20 million.
2. At all times relevant to this Complaint, McLellan was employed at State Street
in  Boston,  Massachusetts.    As an  Executive  Vice  President  and the Global  Head  of  State
Street’s   Portfolio   Solutions   Group,   McLellan   supervised   all   Transition   Management

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employees  in  both  the  United  States  and  Europe,  and  was  responsible  for  the  global  line  of
business at State Street.
3. Transition Management is a service provided by financial institutions like State
Street  to large customers  such  as  pension  funds  or endowments.    Transition  Management
services are utilized by such customers needing to buy and sell large quantities of securities –
for  example,  when  the customers  may  be  changing  fund  managers  or  investment  strategies.
Often,  Transition  Management  customers  have  complex  investments  consisting  of  relatively
illiquid assets that due to their sheer size are difficult to sell without negatively affecting their
price.    Through  the  use  of  Transition  Management  services,  customers  seek  to  efficiently
move their investments, with the goal of reducing risk and cost.
4. McLellan,    along    with    the    State    Street    Co-Schemers, developed    and
orchestrated  a  deliberate  strategy  to  charge  Transition  Management  customers  hidden mark-
ups   on   certain   transactions.      Among   other   things,   State   Street   employees,   under   the
supervision  of  McLellan,  misrepresented  State  Street’s  charges  in  connection  with  certain
transition engagements.  These misrepresentations were made in a variety of communications
to clients, including false trading statements, pre-trade estimates,  and post-trade reporting.
5. When McLellan  and  the  State  Street  Co-Schemers  were ultimately  confronted
by a  customer  that  had  detected  some  of  the  hidden mark-ups, McLellan aided  and  abetted
others at State Street who made materially false and misleading statements to that customer to
conceal the scheme to take hidden mark-ups.  Among other things, in or about August 2011,
McLellan directed others at State Street to misleadingly characterize the hidden mark-ups as a
“fat finger error” and as “inadvertent commissions.”
6. McLellan,  along  with  the  State  Street  Co-Schemers,  initiated  and  participated

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in the  scheme  to  defraud  Transition  Management customers.    In  addition  to  identifying
customers  to  overcharge,  McLellan  oversaw  the  practice  of  taking  hidden mark-ups,  and
directed others  at  State  Street to engage in fraudulent acts and practices in furtherance of the
scheme.
7. By  engaging  in  the  misconduct  directly,  and  by directing  subordinates  to
mislead  customers  and/or  conceal  mark-ups as  part  of  this  scheme  to  defraud,  McLellan  and
the  State  Street  Co-Schemers  generated approximately  $20  million  in  additional  revenue  for
State Street.
8. By willfully, knowingly and/or recklessly engaging in the conduct described in
this  Complaint,  McLellan  violated  Sections  17(a)(1)  and  (a)(3)  of  the  Securities  Act  of  1933
(“Securities Act”) [15 U.S.C. § 77q(a)],  and violated Section 10(b) of the Securities Exchange
Act  of  1934  (“Exchange  Act”)  [15  U.S.C.  § 78j(b)]  and  Rules  10b-5(a)  and  (c)  [17  C.F.R.
§ 240.10b-5] thereunder.  In addition, McLellan aided and abetted violations by others at State
Street of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder.
JURISDICTION AND VENUE

9. The Commission brings this action pursuant to the enforcement authority
conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. §77t(b)] and Section 21(d)
of the Exchange Act [15 U.S.C. §§78u(d)].
10. This  Court  has  jurisdiction  over  this  matter  pursuant  to  28 U.S.C. §    1331,
Sections 20(b) and (d) and 22(a) and (c) of the Securities Act [15 U.S.C. §§77t(b), 77t(d), and
77v(a)] and Sections 21(d), 21(e), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78(u)(e),
and 78aa].
11. Venue  in  this  district is proper  under 28 U.S.C. §   1391(b)(2), Section 22(a) of

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the Securities Act [15 U.S.C. §77v(a)], and  Section  27 of  the Exchange Act [15 U.S.C. §
78aa] because the acts, practices, transactions and courses of  business constituting the alleged
securities law violations occurred in substantial part within this  district and because the
Defendant resides in this district.
12. In connection with the conduct alleged in this complaint, McLellan directly or
indirectly made use of the means or instrumentalities of transportation or communication in
interstate commerce, or of the mails.
13. McLellan’s conduct involved fraud, deceit, or deliberate or reckless disregard
of regulatory requirements, and resulted in substantial loss, or significant risk of substantial
loss, to other persons.
DEFENDANT

14. Ross I. McLellan (“McLellan”), age 44,  is  a  resident  of  Hingham,
Massachusetts.  During  the  relevant period, he was Senior Managing Director and Global
Head of State Street’s Portfolio Solutions Group, the largest component of which was
Transition Management.  McLellan supervised Transition Management employees in both the
United States and Europe, including but not limited to another high-level State Street
employee who worked in the United Kingdom (“State Street Employee A”), and another State
Street employee in the United Kingdom (“State Street Employee B”), who reported directly to
Employee A.  McLellan was also President and Member of the Executive Management Group
for broker-dealer State Street Global Markets, LLC, a State Street subsidiary.  McLellan was
registered with the broker-dealer when affiliated with State Street Global Markets LLC from
November 1997 to November 2011.

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OTHER RELEVANT PARTIES
15. State Street Employee A is a resident of the Netherlands.   At all times
relevant to this Complaint, State Street Employee A was Senior Managing Director
EMEA (Europe, Middle East and Africa) and Head of State Street Portfolio Solutions Group.
State Street Employee A’s primary role at State Street was to obtain new Transition
Management customers and to maintain relationships with existing customers.
16. State  Street  Employee B is  a  resident  of  the United Kingdom.    At  all  times
relevant  to  this  Complaint,  State  Street  Employee B was Head  of  EMEA  Transition
Management  Desk  for State  Street  Portfolio  Solutions  Group,  reporting  to State Street
Employee A.    State  Street  Employee B’s primary responsibilities  at  State  Street  included
supervising a team of analysts, and providing daily updates and post-trade reports to customers
of State Street’s Transition Management business.
17. State Street Corporation is a financial holding company organized under
Massachusetts state law and headquartered in Boston, Massachusetts.  Its common stock is
listed on the New York Stock Exchange under the symbol “STT” and its securities are
registered with the Commission pursuant to Section 12(g) of the Exchange Act.  State Street
Corporation files periodic and current reports with the Commission.
18. State Street Bank and Trust is the principal banking subsidiary of State Street
Corporation.  State Street Bank and Trust is registered with the Federal Reserve as a bank
holding company.
19. State Street Global Markets LLC (“State Street Global Markets”) is a
broker-dealer registered with the Commission under the Exchange Act and is a wholly-owned
subsidiary of State Street.  State Street Global Markets is headquartered in Boston,

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Massachusetts and has been registered as a broker-dealer with the Commission since 1992.
State Street Global Markets provides trade execution services for Transition Management
customers with holdings of US equity and fixed income securities, and therefore generates
revenues from these customers.
20. Portfolio Solutions Group (“Portfolio Solutions”) is a business unit of State
Street,  which  provides  trading,  Transition  Management  and  other  services  to  State  Street
customers.

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FACTUAL ALLEGATIONS

A. State Street’s Transition Management Business

21. Transition Management is a service provided by financial institutions to clients
that are undergoing a “transition.”  Typically, Transition Management services are marketed
to customers,  such  as  pension  funds  or  investment  managers, which are  changing  fund
managers  or  investment  strategies  and  face  large  and  complex  changes  to  their  portfolios  of
assets.    Transition  Management  services  are  marketed  as  a  means  to  help  reduce  the  cost  of
such “transitions,” which often require the execution of a large quantity of orders to buy and
sell stocks (thus generating significant expenses for the customer.)
22. From approximately February  2010  to  September  2011,  State  Street  offered
Transition Management services to customers (both in the United States and elsewhere) that
needed  large  portfolios  of  securities  to  be  restructured,  and  to customers  removing  or
replacing  asset  managers.    While  the  Transition  Management  customers’  holdings  were
comprised  of  different  types  of  investments,  virtually  all  customers required  services  that
included the buying or selling of securities that traded in the United States, including equities
(such as stock) and fixed income instruments (such as corporate or government bonds).
23. There  is  a  wide  range  of  business  arrangements  by  which  various  sellers  of
Transition Management  services  generate  revenue and  charge  fees.    Among  other  methods,
the  transition  manager  may charge  commissions  on  trades  of  equities and/or mark-ups  on
fixed  income  instruments.    Certain  Transition  Management  providers  may  trade  as  a
“principal”  with  their  customers  and  earn  revenue  by  charging  a  spread, i.e.,  taking  the
difference between the “bid” and “ask” amounts on the trades as profit.   Other managers may
offer services at a fixed price, as a project fee.
24. At all times relevant to this Complaint, State Street routinely marketed itself to

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customers  as  offering  a  unique  Transition  Management  model,  in  which  State  Street  would
play an un-conflicted, fiduciary role.  Unlike many banks offering more traditional Transition
Management services, State Street marketed itself as free from the conflicts of interest that are
associated  with  executing  transitions  for its customers  while also  running  a  proprietary
trading book, i.e., trading the firm’s money for the firm’s own benefit.
25. Among other things, State Street touted that it was a founding signatory to the
T-Charter,  a  voluntary,  best-practices  code  for  transition  managers. The  T-Charter,  entered
into by State Street in or about 2007, sets forth a number of principles relating to disclosure
and  remuneration,  and  in  particular  states  that  the  transition  manager  will  not  apply
commissions or charges, adjust prices or apply mark-ups other than as agreed with the client
in  the  contracting  documentation  and  as  disclosed  in  a  disclosure  document.    McLellan  and
others,  including  the  State  Street  Co-Schemers,  explicitly  held  State  Street  out  to  various
Transition Management customers as adhering to the principles contained in the T-Charter.
26. To earn revenue from Transition Management customers, State Street typically
charged  a  commission  when  trading  in  equities  and  took  a  disclosed  mark-up  on  trading  in
fixed income instruments.   In certain instances, and depending on the contractual terms, State
Street charged a fixed management fee, rather than a commission.  State Street also generated
revenue from foreign exchange and futures transactions it carried out as part of a transition.
27. Transition  Management  customers  were  typically  informed  of  State  Street’s
compensation  and  the  charges for  services  by  key  contractual  documentation  provided  by
employees   of   State   Street,   including   the   State   Street   Co-Schemers:      the   Transition
Management    Agreement    (“TMA”) (the governing agreement    for    each    Transition
Management customer); and/or the Periodic or Transition Notice (an Appendix that provided

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specific details of individual transitions for particular customers).  However, foreign exchange
(or “FX”) revenue was not generally specified in the TMA.
28. The  fees  and  commissions  charged  were  material  to  State  Street’s  Transition
Management customers, since the reason that customers seek transition management services
in  the  first  place  is  to  keep  the  cost  of  the  transition  as  low  as  possible,  as  well  as  to  reduce
risk.  Indeed, State Street typically won transition management business through a Request for
Proposal process, in which the lowest bidder often prevailed, and in which the size of fees and
commissions  charged  by  the  transition  manager  was  highly  material  to  the  prospective
customer.
B. State Street’s Overcharging Scheme, Led by McLellan and Others
29. In  2010,  State  Street  began  to  experience  a  shortage  of  major  Transition
Management  deals,  which  impacted  the  financial  performance  of  the  Portfolio  Solutions
business.
30. From approximately February 2010 to September 2011, McLellan, along with
State   Street   Employees   A and B,    schemed   to   charge   hidden mark-ups   to   Transition
Management customers to generate additional revenue.
31. Specifically, in  connection  with  certain  transition  engagements  during  the
period from February  2010  through  September  2011, McLellan  and  the  State  Street  Co-
Schemers  engaged  in  a  pattern  of  fraudulent  acts  and  practices  in  order  to  extract additional
revenues  from  concealed  mark-ups.    In  addition  to  instructing  his  subordinates  generally  to
execute the hidden mark-up scheme, in multiple instances McLellan gave specific instructions
aimed at keeping mark-ups hidden, including what prices to charge and what levels at which
to execute trades.

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32. Typically,  McLellan  and  the  State  Street  Co-Schemers  selected  fixed  income
trades as the vehicle for hiding mark-ups as part of this scheme.  State Street typically did not
disclose pricing on fixed income trading to customers, and was rarely asked for a breakout of
pricing.  By selecting fixed income trades executed during the transition on which to take the
mark-ups,  McLellan  and  the  State  Street  Co-Schemers  sought  to  conceal  the  mark-ups  from
transition customers.
33. McLellan and the State Street Co-Schemers deliberately selected certain types
of  transitions  on  which  to  perpetrate  the  scheme  to  take hidden mark-ups.    Among  other
things,  McLellan  and  the  State  Street  Co-Schemers  selected  transitions  that  were  larger  than
others,  because  it  was  easier  to  hide  the  mark-ups  amidst  the  large  dollar  amounts,  and
because these transitions were large enough that the mark-ups –   even if small on a percentage
basis – could generate substantial profits for State Street.
34. In   2010,   State   Street   was   awarded   two   fixed   income   transitions   for   a
government  body  responsible  for  management  and  administration  of  assets  of  a  country
located in the Middle East Region
1
 (the “Middle Eastern Sovereign Wealth Fund”).  The two
transitions  for  the  Middle  Eastern  Sovereign  Wealth  Fund  had  a  combined  value  of
approximately $6 billion.  It was on these transitions that McLellan and the State Street Co-
Schemers  created  and  deployed  the  hidden mark-up  scheme  for  the  first  time,  beginning  in
early 2010.
The First Middle Eastern Sovereign Wealth Fund Transition
35. In  or  about  March  2010,  the  Middle  Eastern  Sovereign  Wealth  Fund selected
State Street to manage the first of two transitions.  This transition involved the termination of

1
 The Commission is using generic descriptions of the Transition Management customers who were defrauded by
McLellan and others at State Street, rather than including their names in the Complaint.

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a fixed income portfolio of US Treasury bills and required State Street to trade in European,
US and Canadian securities.
36. Prior   to   awarding   State   Street   the   first   transition,   there   were   lengthy
negotiations between State  Street  and the  Middle  Eastern  Sovereign  Wealth  Fund, during
which  State  Street  (specifically,  State  Street  Employee  A)  agreed  to  undertake  the  transition
on a zero commission (and no fee) basis.
37. During  the  negotiations,  in February  2010, State  Street  Employee A advised
the  Middle  Eastern  Sovereign  Wealth  Fund via  email  that State Street  preferred  to  charge  a
disclosed commission, but in this instance it had arranged to receive compensation “from the
‘other side’ (the successful/winning counterparty for each individual security as chosen by us
as your agent in a competitive bid process) ... which will enable us to keep commissions for
[the  Middle  Eastern  Sovereign  Wealth  Fund]  at  zero.”    State  Street  Employee A then
forwarded the email to McLellan.
38. This representation by State Street Employee A was false and misleading.
State Street’s charges would come, not from the “other side,” but from the Middle Eastern
Sovereign Wealth Fund itself.
39. Further, State Street Employee A represented to the Middle Eastern Sovereign
Wealth Fund that this would amount to “only a few” basis points
2
 of commission and that the
Middle Eastern Sovereign Wealth Fund would “get the best execution in the market.”
40. The Middle Eastern Sovereign Wealth Fund asked State Street to confirm that
“[i] n  terms  of  quoting  zero  commission”  State  Street  was  in  compliance  with  the  T-Charter.
In response, State Street Employee A made reference to a draft of the Periodic Notice, which

2
 A “basis point” is a unit of measurement used in finance to describe one hundredth of a percentage point.  Many
financial institutions like State Street calculate commissions and fees using basis points as the units of measurement.

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disclosed that the source of revenue would be mark-ups included in the spread.
41. These representations  by State  Street  Employee A to the  Middle  Eastern
Sovereign  Wealth  Fund  were  misleading.   While  it  was  made  clear  to  the  Middle  Eastern
Sovereign Wealth Fund that State Street would be paid for the transition, it was not true that
State  Street  would  receive  compensation  from  the  counterparty.    In  addition,  the  source  and
calculation  of  revenue  was  not  properly  disclosed.   Neither  the  Periodic  Notice  sent  to  the
Middle Eastern Sovereign Wealth Fund nor the executed version disclosed that the source of
revenue would be mark-ups included in the spread, as required for a firm complying with the
T-Charter.   Nor  did  State  Street  disclose  how  commissions  were calculated  and  collected,
which was also a requirement of the T-Charter.
42. When State  Street  was  awarded  the  first transition  for  the  Middle  Eastern
Sovereign   Wealth   Fund, State   Street   Employee A alerted   McLellan   and State   Street
Employee B, noting:  “...  [I]f they are bonds then we should make our quarter.”  State Street
Employee A’s email  was  revealing;  while  the  transition  for  the  Middle  Eastern  Sovereign
Wealth Fund was purportedly done by State Street for no fee, State Street Employee A clearly
expressed that this transition would generate sufficient income from trading bonds to “make”
the  quarterly  target  for  earnings  by  the  Transition  Management  group  and/or  the  Portfolio
Solutions   team.      In   other   words,   State   Street   Employee A was   acknowledging   that
commissions  would  be  charged  on  fixed  income  trading in  order  to  boost  revenue  to  meet
expectations for a particular quarter.
43. On  or  about  June  3,  2010,  State  Street  Employee  A  advised  State  Street
Employee B over the telephone that he had just spoken with McLellan about the first Middle
Eastern Sovereign Wealth Fund transition, and passed along McLellan’s suggestion that they

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should  take  1  or  2  basis  points  “on  the  outgoing  side.”    Noting  that  McLellan’s  proposed
hidden charges would be easy to conceal, State Street Employee A commented: “[N]o one is
going  to  [expletive]  notice  that  ...  It’s  a  rounding  error[.]”    State  Street  Employee  A  also
assured  State  Street  Employee  B  that  he  had  arranged  for  McLellan  to  be  “on  top  of”  the
trading desk in the US to make sure they facilitated the scheme to take undisclosed mark-ups
on  trades.    State  Street  Employee  A  emphasized  this  point  again  in  an  e-mail  to  McLellan,
telling him:  “Gonna have to be creative and need you involved on the [fixed income] trading
desk in [the] US to ensure they do as we want.”
44. Although  McLellan  was  a  high-ranking  State  Street  employee  who  normally
did  not  directly  supervise  the  traders  responsible  for  executing  a  transition,  he  was  closely
involved in  pricing  on  certain  US  fixed  income  trades  as  part  of  the  first  Middle  Eastern
Sovereign Wealth Fund transition.  For example, between June 15, 2010 and June 18, 2010,
McLellan communicated  the  client-side  prices  for  certain  US-issued  bond  trades  to  State
Street Employee B, and then ensured that those prices were transmitted to the trading desk in
Boston by State Street Employee B.
45. Upon completion of the first transition, the post-trade analysis report provided
to the  Middle  Eastern  Sovereign  Wealth  Fund  omitted  any  reference  to  the  mark-ups  that
State  Street  had  applied  to  the  Middle  Eastern  Sovereign  Wealth  Fund’s  trades,  which
amounted to $2.7 million, equivalent to 9 basis points.  Accordingly, State Street’s claims that
it  was  in  compliance  with  the  T-Charter  were  misleading  to  the  Middle  Eastern  Sovereign
Wealth Fund.

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The Second Middle Eastern Sovereign Wealth Fund Transition
46. In  or  about  May  of  2010,  State  Street  learned  that  the  Middle  Eastern
Sovereign  Wealth  Fund  would  be  accepting  bids  for  a  second  transition,  which  involved  the
restructuring of a US Treasury bill portfolio valued at $4 billion and was fixed income only,
made up of European, US and Canadian trades.  While McLellan was not directly involved in
the  bidding  process  for  the  second  transition,  State  Street  Employee A kept  McLellan
apprised Employee A of the negotiations, and McLellan guided State Street Employee A as to
how to structure the bid.
47. For example, in May of 2010, State Street Employee A, in preparing the pitch
for  the  second  Middle  Eastern  Sovereign  Wealth  Fund  transition,  told  McLellan  that  a
competitor  was  bidding  to  perform  the  transition  for  a  fee  of  2  basis  points.    State  Street
Employee A then stated to McLellan:  “We need to find a way to charge a spread.”  McLellan
directed State  Street  Employee  A  to  bid  1.75  basis  points  as  a  flat  fee  and  told  State  Street
Employee A:  “We will make it work.”
48. As  the  e-mails  exchanged  by  McLellan  and  State  Street  Employee A the
following  day  made  clear,  McLellan  intended  to  “make  it  work”  by  charging  hidden mark-
ups.  In an e-mail exchange on May 13, 2010, McLellan and State Street Employee A debated
the  wording  of  the  standard  Transition  Management  Agreement  at  State  Street,  and  then
agreed to charge a management fee and zero commission, “acting as riskless principal.”
49. Prior  to  bidding  for  the  second  Middle  Eastern  Sovereign  Wealth  Fund
transition, on August 29, 2010, State Street Employee A suggested to McLellan in an e-mail
that State Street should “bid zero again” and McLellan replied: “Agree 100 percent.”
50. The  draft  Periodic  Notice  provided  by  State  Street  to the  Middle  Eastern

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Sovereign Wealth Fund stated as follows: “Trades will not attract any commission and will be
priced  net.  The  manager  may  benefit  from  a  bid-ask  spread.”   However,  the  signed  version
returned by the Middle Eastern Sovereign Wealth Fund did not contain this language.
51. Once  State  Street  was  awarded  the  second  fixed  income  transition  for  the
Middle  Eastern  Sovereign  Wealth  Fund, on  October  21,  2010,  State  Street  Employee A and
State Street Employee B exchanged emails commenting:  “Nice!” and “Back up the truck!”
52. On or about October 21, 2010, State Street Employee A e-mailed another State
Street employee to announce that they had won the second Middle Eastern Sovereign Wealth
Fund transition.  When the employee asked about projected revenues, State Street Employee
A responded:    “Back  up  the  truck.    6  or  7  or  8.    Whatever  you  want.”    Shortly  before  the
transition  commenced,  McLellan  and  State  Street  Employee A exchanged  further  emails
about concealing the documents governing the transition from State Street’s legal department:
McLellan: Did  they  [e.g.,  the  legal  department]  look  at  the  original
agreement?

State  Street  Employee A:  “Absolutely  not.  Nor  did  they  look  at  the
periodic notice.  This can of worms stays closed!”

“[By the way]- there is no way we can disclose our spread.”

McLellan: “Agreed.”

53. Shortly  after  the  second  transition  for  the  Middle  Eastern  Sovereign  Wealth
Fund was  awarded  to  State  Street,  McLellan  again  directed  the  trading  strategies  and
suggested charging an 18 basis point markup on one trade in particular.
54. In  order  to  disguise  the  mark-ups  which  State  Street  expected  to  charge  the
Middle  Eastern  Sovereign  Wealth  Fund,  the  pre-trade  estimate  analysis  report  added  a
fictitious  figure,  which  was  labeled  a  “market  impact”  estimate.    This  so-called  “market

16

impact”  estimate  of  $5  million  was  moved  from  the  estimate  of  the  bid-ask  spread  by  State
Street’s  Transition  Management  employees on  instructions  from  Portfolio  Solutions  senior
management.    This  presentation  of  the  trading  costs  concealed  the  amount  of  the  mark-up
which State Street expected to charge the Middle Eastern Sovereign Wealth Fund.
55. State  Street’s  earnings  for  the  second  transition  were  included  in  the  market
impact and bid-ask spread costs,  instead of being separately listed, thus obscuring the amount
charged by State  Street  on  this  transition  from  the  Middle  Eastern  Sovereign  Wealth  Fund.
The total costs listed in the post-trade analysis report include $4.7 million for market impact,
which was misleading, since that number incorporated the earnings made by State Street from
the hidden mark-ups which State Street had applied to the Middle Eastern Sovereign Wealth
Fund’s trades.
56. In  total,  State  Street  charged approximately $9.7  million  in  hidden  mark-ups
for the two Middle Eastern Sovereign Wealth Fund transitions.
December 2010:  McLellan and Others Effect the Scheme to Defraud
on an Irish Government Agency

57. On  or  about  December  10,  2010, State  Street  was  awarded  a  transition  for  a
government agency that managed the assets and liabilities of the government of the Republic of
Ireland, including the national debt and pension reserves (the “Irish Government Agency”).  The
transition involved both fixed income and equities trading (including US trading).  The transition
was valued at approximately 4.7 billion Euros, and was effected by State Street in three separate
stages (or “tranches”).
58. As  part  of  the  scheme  to  defraud  State  Street’s  customers,  McLellan  and  the
State Street Co-Schemers charged the Irish Government Agency hidden mark-ups for the equity
and fixed income trades that were conducted as part of the transition.

17

59. In  November  of  2010, McLellan  and  the  State  Street  Co-Schemers  began
discussing  the  bid for  the  Irish  Government  Agency  transition.    During  those  discussions,
State  Street  Employee A e-mailed  McLellan  to  stress  the  importance  of  winning  the
transition,  exclaiming:    “Gotta  win  this  one!    Any  ideas  how  to  get  more  revenue  would  be
appreciated.”  State Street Employee A then suggested to McLellan that State Street propose a
1 basis point management fee with “no commissions, and then take a spread[.]”
60. McLellan supervised State Street Employee A, and advised him about how to
structure the bid to win the Irish Government Agency transition.  Specifically, McLellan told
State  Street  Employee A:    “Agree  with  a  zero  commission  bid.”    State  Street  Employee A
replied:  “Great  minds  think  alike.    We  have  to  charge  [a]  fee  ...  otherwise  they  get
suspicious[.]”  State Street Employee A later e-mailed State Street Employee B:  “Fees: 1.25
[basis points].  No commissions.  Just to clarify –   1.25 bps is the management fee.  The extra
quarter point makes it look like we actually thought about it and did the calculations.”
61. The  Irish  Government  Agency  eventually  agreed  to  pay  a fixed  management
fee  of  1.65  basis  points,  as  set  out  in  the  Transition  Notice,  and  subsequently,  State  Street
reduced that fixed fee to 1.25 basis points for the third tranche.  Meanwhile, McLellan and the
State Street Co-Schemers continued to hone their scheme to extract hidden fees from the Irish
Government  Agency  transition.    Through  e-mail  communications  in  late  December  2010,
State Street Employee A and McLellan worked out the specifics of their plan to charge hidden
trading fees to the Irish Government Agency:
State Street Employee A:  “need to be very creative here”

McLellan:  “we will.”
. . .
State Street Employee A:  “Here’s what I think we should do with our
new best friends[...]: - 1.65bps for the privilege of working with us [...]

18

- 10-12 bps out of FI [fixed income]– 3bps spread out of US equity and
global small cap – trade all global em (sic) mkt net through brokers –
organise with FX [foreign exchange] to collect 5bps for trading back to
euro. Perhaps the FX bit needs a discussion upfront involving you and
[an individual from SSGM Sales Trading Research], but we HAVE to
show revenue in our numbers”.

McLellan:  “. . . Fx won’t be a problem.”

62. In  addition  to  the  disclosed  management  fee,  McLellan and  the  State  Street
Co-Schemers charged the Irish Government Agency hidden commissions on the equity trades
on both the first and third tranches, and charged hidden mark-ups on the fixed income trades
across all three tranches.
63. In  order  to  conceal  the hidden commissions  added  to  the  Irish  Government
Agency’s equity trades, and in furtherance of this scheme, McLellan and the State Street Co-
Schemers  directed  that  the  relevant  trades  be  booked  through  a  trading  account  that  State
Street normally used for non-Transition Management business to provide an average price to
customers  for  a  day’s  trading.   At  the  direction  of  McLellan  and  the  State  Street  Co-
Schemers, employees extracted trade data from the trading records, added commissions, and
then  uploaded  the  adjusted  equity  prices  into  the  trading  records.   Through  this  back-door
method  of  booking  the  trades,  McLellan  and  the  State  Street  Co-Schemers  intentionally hid
the  commissions they  had  added  to  the  equity  trades  executed  on  behalf  of  the  Irish
Government Agency.
64. Contrary  to their  representations,  which  were  set  forth  in  the State  Street
agreement  with  the  Irish  Government  Agency,  McLellan  and  the  State  Street  Co-Schemers
also directed the trading desks to apply mark-ups to fixed income trades.   These instructions
directly contradicted  written  instructions  to  traders  not  to  charge  commissions  for  fixed
income on transitions.

19

65. When the application of mark-ups on fixed income trades was questioned by a
State Street employee in Boston, he was informed by State Street Employee A via e-mail on
February 24, 2011: “[I]ts on a need to know basis... speak with Ross [McLellan], who knows
the  strategy  here.”    State  Street  Employee A’s e-mail  was  then  forwarded  to  McLellan  by  a
managing director, who asked McLellan:  “Care to share?  I want to make sure I tell Finance
the right amount to accrue, [as it] looks like we are recognizing revenues on the fixed income
and futures.”
66. Throughout  all  three  tranches  of  the  transition  for  the  Irish  Government
Agency, McLellan monitored and guided the scheme to take hidden mark-ups.  On March 16,
2011, McLellan received documents for the second tranche of the transition, which stated that
“zero  comm[ission]s”  were  taken.    McLellan  forwarded  the  documents  to  State  Street
Employee A via email, and asked if State Street Employee A was “giving [expletive] away?”
State Street Employee A responded:  “Have I ever let you down on [fixed income?]”
67. Under the terms of its contract with the Irish Government Agency, State Street
earned  a  contractual fee  for  the transition  totaling  approximately $1,634,085.    In  addition,
through the fraudulent acts and practices of McLellan and the State Street Co-Schemers, State
Street  took additional  revenue  of  approximately $3.7  million  from  the  hidden mark-ups  and
commissions.
February 2011:  McLellan and His Co-Schemers Defraud a British Postal Company

68. In early February 2011, State Street learned of an opportunity to bid on a £1.3
billion (British Pounds) transition for a postal service company that provides mail collection
and  delivery  services  throughout  the  United  Kingdom  (the  “British  Postal  Company”).    The
transition  was  fixed  income  only,  and  comprised  of  both  European  and  US  trades.    On

20

February  3,  2011,  State  Street  Employee A e-mailed  McLellan,  noting  that  the  potential  bid
was  “[c]onfidential  but...  gotta  win  that  one!”    In  response,  McLellan  told  State  Street
Employee A:    “Thin  to  win.”    This  reflected  McLellan’s  and  his  co-schemers’  strategy  of
winning  bids  by  proposing  very  low  (“thin”)  fees  and  then  making  the  deals  profitable  by
adding hidden commissions after they won the business.
69. In  February  2011,  the  British  Postal  Company  awarded  the  transition  to  State
Street.  State Street’s Transition Notice advised the British Postal Company that a fixed fee of
1.75 basis points “on the value of the portfolio” would be charged.  State Street’s total agreed
fee was $922,107.
70. The British Postal Company specifically sought confirmation that the fixed fee
was the “full and final transition fee including all buying and selling required.”   State Street
Employee A confirmed in writing that “the fee includes all trading required.”   To enhance the
impression that the deal was unfavorable for State Street he added,   “Don’t make me go this
low every time though!”
71. State Street Employee A’s e-mail to the British Postal Company was false and
misleading.    In  fact,  McLellan  and  the  State  Street  Co-Schemers  intended  to  charge  the
British Postal Company hidden mark-ups on the transition.  On February 21, 2011, McLellan
praised State Street Employee A for winning the bid with the British Postal Company, saying
“Nice  work.”    State  Street  Employee A immediately replied  to  McLellan  by  saying:  “I  am
thinking 1.5-2bpy [basis points]”.
72. McLellan gave explicit instructions to the trading desk in Boston to ensure that
–    as Employee A proposed –    commissions  were  charged  on  the  British  Postal  Company
transition  trades,  contrary  to  the  express  representations  to  the  customer  that  there  would  be

21

no  such  charges.    This  meant  that  McLellan  had  to  override  the  internal written  instructions
that had  been  supplied  to  the  State  Street  trading  desk,  based  on  the  agreement  with  the
British  Postal  Company.    In  one  such  call,  McLellan  told  the  trader:  “On  the  [transition...]
that  came  in  yesterday,  you  can  actually  take  a  basis  point  of  yield  on  those.”    As  the
conversation  continued,  McLellan  directed  the  trader  to  disregard  prior  trading  instructions
from others at State Street not to charge any commissions:
 Trader:  Okay.  One [basis point]?  Got it.

 McLellan:  All right.  I will catch up later.

Trader:  I was just actually on a chat with [another State Street employee].  She
was  just  telling  me,  don’t  charge  any  commissions,  so  I  was  just  going  to  – I
am going to take your word and just go with it.

 McLellan:  Yes, I just talked to [State Street Employee A].

 Trader:  Awesome.  All right, I will do one [basis point].

 McLellan:  Thanks, bye.  Thanks pal.

73. Beyond  directing  the  trading  desk  to  apply  hidden mark-ups  to  US  trades,
McLellan   also   instructed   State   Street   employees   to   conceal   the   commissions   on
documentation sent to the British Postal Company.  In February 2011, McLellan spoke to the
same  trader  in  Boston,  asking  whether  he  was  “backing  out”  the  British  Postal  Company
(meaning,  deleting  commissions  from documentation).    The  trader  confirmed  that  he  was
“doing it right now” as McLellan inquired   about “corporate spreads” and confirmed that the
transition was “hedged with futures.”  McLellan then instructed the trader:  “All right.  Stay
with  the  BPS  basis  point  of  yield,  then.”    The  trader  assured  McLellan  that  he  would  delete
any reference to commissions charged in the file for the British Postal Company transition – a
file that would go first to State Street compliance, and then to the transition customer:  “Yes,

22

definitely.  And I am zeroing out those commissions when I send over the file.”
74. Similar  to  the instructions  sent  to  State  Street’s  trading  desk  in  the  United
States,  the  trading  instructions  sent  to  State  Street’s  UK  trading  desk  for  the  British  Postal
Company transition stated “Comms: ZERO COMMS” (which meant that no mark-up should
be  applied  to  the  trades).    This  was  consistent  with  the  contractual  documentation for  the
British Postal Company transition.  In practice, however, an average mark-up of 1 basis point
was applied to US trades, and an average mark-up of 2 basis points was applied to European
trades.
75. As with  the  Middle  Eastern  Sovereign  Wealth  Fund,  McLellan  and  his  co-
schemers concealed the mark-ups in the transition reports sent to the British Postal Company.
Among  other  things,  the  initial  pre-trade  analysis  report  included  an  undisclosed  mark-up  of
1.75 basis points in the “bid-ask” spread line of the initial pre-trade analysis report.  This was
reduced  to  0.75 basis  points  in  the  final  pre-trade  analysis  report  sent  to  the  British  Postal
Company.
76. The transition  results  reported  to  the  British  Postal  Company  were almost
identical to the estimate in the pre-trade analysis report, but again, hidden within the “bid-ask”
spread line was more than $3 million of revenue taken by State Street as a result of the hidden
mark-ups which had been applied.
 Additional Misconduct by McLellan and Others at State Street
77. In  addition  to  the  transitions  for  the  Middle  Eastern  Sovereign  Wealth  Fund,
the Irish Government Agency and the British Postal Company, McLellan and the State Street
Co-Schemers engaged in fraudulent acts and practices in several other large-scale transitions
at  State  Street  between  February  2010  and  September  2011,  including  (but  not  limited  to)  a

23

transition for a UK-based pension fund for an ₤850 million (British Pounds) bond portfolio, a
€1.6  billion  (Euros) transition  in  the  Netherlands  that  required  the  restructuring  of  the  Euro-
denominated  fixed  income  portfolios  of  two  pension  funds,  and  a  €1  billion  (Euros) global
equities  and  fixed  income  transition  for  a  telecommunications  agency  in  the  Republic  of
Ireland.
78. State  Street  earned  additional  revenue  of  at  least  $3  million  from  the  hidden
mark-ups on other transactions for the above-described Transition Management customers.
C. Discovery and Cover-up of the Overcharging Scheme

79. On June 21, 2011, the British Postal Company contacted State Street
Employee 1,  asking if the fee of 1.75 basis points (plus commissions for futures execution)
was “the sole revenue
 for [State Street] and/or any of its affiliates on this event.”
80. State Street Employee A falsely confirmed  that the British Postal Company’s
understanding was correct,  despite  knowing  that  undisclosed mark-ups  had been taken on
the fixed income trades.  The British Postal Company responded by noting that their own
consultant, using  publicly  available bond pricing  information in  the  US,  had identified
mark-ups  on certain US fixed income  trades  which had  not  been
 disclosed.
81. State Street Employee A initially sought to stave off further inquiry from the
British Postal Company, replying by e-mail that it
 “doesn’t  seem  right,”  despite  his
knowledge that hidden mark-ups had been deliberately applied to the trades.  However, the
British Postal Company persisted in raising their concerns about the hidden mark-ups on
transition trades by State Street.
82. In or about June 2011, McLellan, State Street Employee A, and State
Street Employee B participated in a meeting, during which McLellan explicitly

24

proposed lying to the British Postal Company – to wit, that State Street’s
undisclosed mark-ups were the result of a “fat finger mistake” (essentially a clerical
or typing error) and that they only occurred on US-based trades.  As McLellan, State
Street Employee A, and State Street Employee B well knew, they had intentionally taken
hidden mark-ups on this transition, and those hidden mark-ups were not the result of
any “fat finger mistake” or any kind of inadvertence.  Nonetheless, the co-schemers
agreed with McLellan that they should make the following misrepresentation to The British
Postal Company:
“our trading desk in the US has erroneously applied commissions of 1   bp of yield
 to
trades that should have gone through at zero commission.”
State  Street  Employee A  also  sent  an  e-mail  to  the  British  Postal  Company,  stating  that  the
markup  taken  on  US  trades  was  a  “fat  finger  error.”    As  State  Street  Employee A  (and
McLellan)  knew,  both  of  these  statements  were  misrepresentations,  since  the  mark-ups  were
taken intentionally.
83. McLellan, by directing the State Street Co-Schemers to lie to the British Postal
Company, aided and abetted material misrepresentations by the State Street Co-Schemers.
84. McLellan proposed that a third party calculate the shortfall and refund owed to
the British Postal Company as a result of the undisclosed mark-ups on US-based fixed income
trades.  At the direction of McLellan and others, State Street  agreed to  rebate
 the British
Postal Company  approximately $1 million for the mark-ups that had been applied to the US
trades, again describing them in words suggested by McLellan:
“inadvertent commissions.”
85. In order to avoid drawing attention from State Street’s compliance or legal

25

personnel, McLellan and others at State Street  circumvented the usual processes and
procedures to reimburse the British Postal Company without recording the repayment in State
Street’s loss event tracking system.
86. While  arranging  to reimburse the British Postal Company,   McLellan
continued to conceal not only the fact that mark-ups on US trades were taken intentionally but
that  State Street deliberately  took hidden mark-ups  on
 the British Postal Company’s
European trades, resulting in additional revenue of approximately $2 million.

26

CLAIMS FOR RELIEF
First Claim for Relief
Antifraud Provisions of the
Securities Act
[Violation of Section 17(a)
of the Securities Act]

1. The  Commission  repeats  and  incorporates  by  reference the  allegations  in
paragraphs 1 through 86 above.
2. By  engaging  in  the  conduct  described  above,  Defendant  Ross  McLellan  has,
directly or indirectly and singly or in concert, acting intentionally, knowingly or recklessly, by
use of the means or instruments of transportation or communication in interstate commerce or
by  the  use  of  the  mails,  in  the  offer  or  sale  of  securities,  employed  devices,  schemes,  or
artifices  to  defraud,   and/or engaged  in  transactions,  acts,  practices  or  courses  of  business
which operated or would have operated as a fraud or deceit upon purchasers of securities.
3. By   engaging   in   the   conduct   described   above,   McLellan   has   directly   or
indirectly  and  singly  or  in  concert,  violated,  and  unless  enjoined  will  continue  to  violate,
Sections 17(a)(1) and 17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)].

27

Second Claim for Relief
Antifraud Provisions of
the Exchange Act
[Violation of Section 10(b)
of Exchange Act and Rule
10b-5 By McLellan]

4. The  Commission  repeats  and  incorporates  by  reference the  allegations  in
paragraphs 1 through 86 above.
5. By  engaging in  the  conduct  described  above,  Defendant Ross  McLellan  has,
directly or indirectly and singly or in concert, acting intentionally, knowingly or recklessly, in
connection  with  the  purchase  or  sale  of  securities,  by  use  of  the  means  or  instrumentalities  of
interstate  commerce  or  the  mail,  employed  devices,  schemes,  or  artifices  to  defraud,   and/or
engaged  in  transactions,  acts,  practices,  or  courses  of  business  which  operated  or  would  have
operated as a fraud or deceit upon purchasers of securities and upon other persons.
6. By engaging in the conduct described above, McLellan violated Section  10(b)
of the Exchange Act [15 U.S.C. §   78j(b)] and Rules 10b-5(a) and (c) thereunder [17 C.F.R. §
240.10b-5].

28

Third Claim for Relief
Antifraud Provisions of
the Exchange Act
[Aiding and Abetting
Violation of Section 10(b)
of Exchange Act and Rule
10b-5 By McLellan]

7. The  Commission  repeats  and  incorporates  by  reference the  allegations  in
paragraphs 1 through 86 above.
8. By  engaging in  the  conduct  described  above,  Defendant Ross  McLellan  has,
directly or indirectly and singly or in concert, acting intentionally, knowingly or recklessly, in
connection  with  the  purchase  or  sale  of  securities,  by  use  of  the  means  or  instrumentalities  of
interstate  commerce  or  the  mail,   made  untrue  statements  of  material  fact  or  omitted  to  state
material fact(s) necessary to make statements made not misleading in light of the circumstances
under which they were made.
9. McLellan  knowingly  or  recklessly  provided  substantial  assistance  to  others  at
State Street’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
10. By  engaging  in  the  conduct  described  above,  McLellan  aided  and  abetted
violations  of  Section  10(b)  of  the  Exchange Act  [15 U.S.C. §   78j(b)]  and  Rule  10b-5(b)
thereunder [17 C.F.R. § 240.10b-5].

29

PRAYER FOR RELIEF

WHEREFORE, the Commission requests that this Court:

A. Find that McLellan committed the violations alleged in this Complaint;
B. Enter a permanent injunction restraining and  enjoining  McLellan  and  each  of
his   agents,   servants,   employees   and   attorneys   and   all      persons   in   active   concert   or
participation  with  him who  receive  actual  notice  of  the  injunction by  personal  service or
otherwise,  including  facsimile   transmission  or  overnight  delivery  service,  from  future
violations of, and aiding and abetting future violations of, Section 17(a) of the Securities Act
[15 U.S.C. §77q(a)],  and Section 10(b) of the  Exchange Act [15 U.S.C. § 78j(b)], and Rule
10b-5 thereunder [17 C.F.R. § 240.10b-5]  ;
C. Order  McLellan  to  disgorge  the  ill-gotten gains he received as a result of his
violation of the federal securities laws, plus pre-judgment interest thereon;
D. Order  McLellan  to  pay  civil monetary  penalties  pursuant  to  Section 20(d) of
the Securities Act [15 U.S.C. §77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C.
§ 78u(d)(3)];
E. Retain  jurisdiction  over  this  action  to  implement and  carry  out  the  terms of all
orders and decrees that may be entered; and
F. Award such other and further relief as the Court deems just and proper.

30

JURY DEMAND

The Commission hereby demands a  trial by jury on all claims so triable.

Respectfully submitted,

SECURITIES AND EXCHANGE  COMMISSION

By its attorneys,

/s/  Rua M. Kelly
Eric Heining (Mass. Bar No. 664900)
Rua M. Kelly (Mass. Bar No. 643351)
Benjamin Mack (Mass. Bar No. 661590)
33 Arch Street, 24
th
 Floor
Boston, MA  02110
(617)-573-8941 (Kelly direct)
(617)-573-4590 (facsimile)
Email:  [email protected]

Dated:  May 13, 2016

UNITED STATES DISTRICT COURT                 
DISTRICT OF MASSACHUSETTS 

  
SECURITIES AND EXCHANGE : 
COMMISSION, : 
 : 

Plaintiff, : 
 : 

v. : Civil Action No. 
 : 
 : 
ROSS I. MCLELLAN, : JURY TRIAL DEMANDED 
 : 
 : 

Defendant. : 
   

 

COMPLAINT 
 

Plaintiff Securities and Exchange Commission (the “Commission”) alleges the 

following against Defendant Ross I. McLellan (“McLellan”). 

PRELIMINARY STATEMENT 
 

1. From approximately February 2010 to September 2011, McLellan and others at 

State Street Corporation (“State Street”) schemed to defraud customers of State Street’s 

Transition Management line of business by charging those customers hidden and unauthorized 

mark-ups (or amounts added to the cost of the service) on trading in U.S. and European 

securities.  The hidden mark-up scheme by McLellan and State Street Employees A and B 

(also referenced herein as the “State Street Co-Schemers,”) encompassed transitions carried 

out for at least six State Street customers, who were collectively overcharged by 

approximately $20 million.   

2. At all times relevant to this Complaint, McLellan was employed at State Street 

in Boston, Massachusetts.  As an Executive Vice President and the Global Head of State 

Street’s Portfolio Solutions Group, McLellan supervised all Transition Management 

Case 1:16-cv-10874   Document 1   Filed 05/13/16   Page 1 of 30



 

2 
 

employees in both the United States and Europe, and was responsible for the global line of 

business at State Street. 

3. Transition Management is a service provided by financial institutions like State 

Street to large customers such as pension funds or endowments.  Transition Management 

services are utilized by such customers needing to buy and sell large quantities of securities – 

for example, when the customers may be changing fund managers or investment strategies.  

Often, Transition Management customers have complex investments consisting of relatively 

illiquid assets that due to their sheer size are difficult to sell without negatively affecting their 

price.  Through the use of Transition Management services, customers seek to efficiently 

move their investments, with the goal of reducing risk and cost. 

4. McLellan, along with the State Street Co-Schemers, developed and 

orchestrated a deliberate strategy to charge Transition Management customers hidden mark-

ups on certain transactions.  Among other things, State Street employees, under the 

supervision of McLellan, misrepresented State Street’s charges in connection with certain 

transition engagements.  These misrepresentations were made in a variety of communications 

to clients, including false trading statements, pre-trade estimates, and post-trade reporting.     

5. When McLellan and the State Street Co-Schemers were ultimately confronted 

by a customer that had detected some of the hidden mark-ups, McLellan aided and abetted 

others at State Street who made materially false and misleading statements to that customer to 

conceal the scheme to take hidden mark-ups.  Among other things, in or about August 2011, 

McLellan directed others at State Street to misleadingly characterize the hidden mark-ups as a 

“fat finger error” and as “inadvertent commissions.”   

6. McLellan, along with the State Street Co-Schemers, initiated and participated 

Case 1:16-cv-10874   Document 1   Filed 05/13/16   Page 2 of 30



 

3 
 

in the scheme to defraud Transition Management customers.  In addition to identifying 

customers to overcharge, McLellan oversaw the practice of taking hidden mark-ups, and 

directed others at State Street to engage in fraudulent acts and practices in furtherance of the 

scheme.   

7. By engaging in the misconduct directly, and by directing subordinates to 

mislead customers and/or conceal mark-ups as part of this scheme to defraud, McLellan and 

the State Street Co-Schemers generated approximately $20 million in additional revenue for 

State Street.  

8. By willfully, knowingly and/or recklessly engaging in the conduct described in 

this Complaint, McLellan violated Sections 17(a)(1) and (a)(3) of the Securities Act of 1933 

(“Securities Act”) [15 U.S.C. § 77q(a)], and violated Section 10(b) of the Securities Exchange 

Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rules 10b-5(a) and (c) [17 C.F.R. 

§ 240.10b-5] thereunder.  In addition, McLellan aided and abetted violations by others at State 

Street of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder.   

JURISDICTION AND VENUE 
 

9. The Commission brings this action pursuant to the enforcement authority 

conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. §77t(b)] and Section 21(d) 

of the Exchange Act [15 U.S.C. §§78u(d)]. 

10. This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1331, 

Sections 20(b) and (d) and 22(a) and (c) of the Securities Act [15 U.S.C. §§77t(b), 77t(d), and 

77v(a)] and Sections 21(d), 21(e), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78(u)(e), 

and 78aa].   

11. Venue in this district is proper under 28 U.S.C. § 1391(b)(2), Section 22(a) of 

Case 1:16-cv-10874   Document 1   Filed 05/13/16   Page 3 of 30



 

4 
 

the Securities Act [15 U.S.C. §77v(a)], and Section 27 of the Exchange Act [15 U.S.C. § 

78aa] because the acts, practices, transactions and courses of business constituting the alleged 

securities law violations occurred in substantial part within this district and because the 

Defendant resides in this district. 

12. In connection with the conduct alleged in this complaint, McLellan directly or 

indirectly made use of the means or instrumentalities of transportation or communication in 

interstate commerce, or of the mails. 

13. McLellan’s conduct involved fraud, deceit, or deliberate or reckless disregard 

of regulatory requirements, and resulted in substantial loss, or significant risk of substantial 

loss, to other persons. 

DEFENDANT 
 

14. Ross I. McLellan (“McLellan”), age 44, is a resident of Hingham, 

Massachusetts.  During the relevant period, he was Senior Managing Director and Global 

Head of State Street’s Portfolio Solutions Group, the largest component of which was 

Transition Management.  McLellan supervised Transition Management employees in both the 

United States and Europe, including but not limited to another high-level State Street 

employee who worked in the United Kingdom (“State Street Employee A”), and another State 

Street employee in the United Kingdom (“State Street Employee B”), who reported directly to 

Employee A.  McLellan was also President and Member of the Executive Management Group 

for broker-dealer State Street Global Markets, LLC, a State Street subsidiary.  McLellan was 

registered with the broker-dealer when affiliated with State Street Global Markets LLC from 

November 1997 to November 2011.   

  

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OTHER RELEVANT PARTIES 

15. State Street Employee A is a resident of the Netherlands.  At all times 

relevant to this Complaint, State Street Employee A was Senior Managing Director 

EMEA (Europe, Middle East and Africa) and Head of State Street Portfolio Solutions Group.  

State Street Employee A’s primary role at State Street was to obtain new Transition 

Management customers and to maintain relationships with existing customers. 

16. State Street Employee B is a resident of the United Kingdom.  At all times 

relevant to this Complaint, State Street Employee B was Head of EMEA Transition 

Management Desk for State Street Portfolio Solutions Group, reporting to State Street 

Employee A.  State Street Employee B’s primary responsibilities at State Street included 

supervising a team of analysts, and providing daily updates and post-trade reports to customers 

of State Street’s Transition Management business.   

17. State Street Corporation is a financial holding company organized under 

Massachusetts state law and headquartered in Boston, Massachusetts.  Its common stock is 

listed on the New York Stock Exchange under the symbol “STT” and its securities are 

registered with the Commission pursuant to Section 12(g) of the Exchange Act.  State Street 

Corporation files periodic and current reports with the Commission.   

18. State Street Bank and Trust is the principal banking subsidiary of State Street 

Corporation.  State Street Bank and Trust is registered with the Federal Reserve as a bank 

holding company.  

19. State Street Global Markets LLC (“State Street Global Markets”) is a 

broker-dealer registered with the Commission under the Exchange Act and is a wholly-owned 

subsidiary of State Street.  State Street Global Markets is headquartered in Boston, 

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Massachusetts and has been registered as a broker-dealer with the Commission since 1992.  

State Street Global Markets provides trade execution services for Transition Management 

customers with holdings of US equity and fixed income securities, and therefore generates 

revenues from these customers. 

20. Portfolio Solutions Group (“Portfolio Solutions”) is a business unit of State 

Street, which provides trading, Transition Management and other services to State Street 

customers. 

  

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FACTUAL ALLEGATIONS 
 

A. State Street’s Transition Management Business 
 

21. Transition Management is a service provided by financial institutions to clients 

that are undergoing a “transition.”  Typically, Transition Management services are marketed 

to customers, such as pension funds or investment managers, which are changing fund 

managers or investment strategies and face large and complex changes to their portfolios of 

assets.  Transition Management services are marketed as a means to help reduce the cost of 

such “transitions,” which often require the execution of a large quantity of orders to buy and 

sell stocks (thus generating significant expenses for the customer.) 

22. From approximately February 2010 to September 2011, State Street offered 

Transition Management services to customers (both in the United States and elsewhere) that 

needed large portfolios of securities to be restructured, and to customers removing or 

replacing asset managers.  While the Transition Management customers’ holdings were 

comprised of different types of investments, virtually all customers required services that 

included the buying or selling of securities that traded in the United States, including equities 

(such as stock) and fixed income instruments (such as corporate or government bonds).     

23. There is a wide range of business arrangements by which various sellers of 

Transition Management services generate revenue and charge fees.  Among other methods, 

the transition manager may charge commissions on trades of equities and/or mark-ups on 

fixed income instruments.  Certain Transition Management providers may trade as a 

“principal” with their customers and earn revenue by charging a spread, i.e., taking the 

difference between the “bid” and “ask” amounts on the trades as profit.   Other managers may 

offer services at a fixed price, as a project fee.   

24. At all times relevant to this Complaint, State Street routinely marketed itself to 

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customers as offering a unique Transition Management model, in which State Street would 

play an un-conflicted, fiduciary role.  Unlike many banks offering more traditional Transition 

Management services, State Street marketed itself as free from the conflicts of interest that are 

associated with executing transitions for its customers while also running a proprietary 

trading book, i.e., trading the firm’s money for the firm’s own benefit.   

25. Among other things, State Street touted that it was a founding signatory to the 

T-Charter, a voluntary, best-practices code for transition managers. The T-Charter, entered 

into by State Street in or about 2007, sets forth a number of principles relating to disclosure 

and remuneration, and in particular states that the transition manager will not apply 

commissions or charges, adjust prices or apply mark-ups other than as agreed with the client 

in the contracting documentation and as disclosed in a disclosure document.  McLellan and 

others, including the State Street Co-Schemers, explicitly held State Street out to various 

Transition Management customers as adhering to the principles contained in the T-Charter. 

26. To earn revenue from Transition Management customers, State Street typically 

charged a commission when trading in equities and took a disclosed mark-up on trading in 

fixed income instruments.  In certain instances, and depending on the contractual terms, State 

Street charged a fixed management fee, rather than a commission.  State Street also generated 

revenue from foreign exchange and futures transactions it carried out as part of a transition.  

27. Transition Management customers were typically informed of State Street’s 

compensation and the charges for services by key contractual documentation provided by 

employees of State Street, including the State Street Co-Schemers:  the Transition 

Management Agreement (“TMA”) (the governing agreement for each Transition 

Management customer); and/or the Periodic or Transition Notice (an Appendix that provided 

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specific details of individual transitions for particular customers).  However, foreign exchange 

(or “FX”) revenue was not generally specified in the TMA.   

28. The fees and commissions charged were material to State Street’s Transition 

Management customers, since the reason that customers seek transition management services 

in the first place is to keep the cost of the transition as low as possible, as well as to reduce 

risk.  Indeed, State Street typically won transition management business through a Request for 

Proposal process, in which the lowest bidder often prevailed, and in which the size of fees and 

commissions charged by the transition manager was highly material to the prospective 

customer. 

B. State Street’s Overcharging Scheme, Led by McLellan and Others 

29. In 2010, State Street began to experience a shortage of major Transition 

Management deals, which impacted the financial performance of the Portfolio Solutions 

business.   

30. From approximately February 2010 to September 2011, McLellan, along with 

State Street Employees A and B, schemed to charge hidden mark-ups to Transition 

Management customers to generate additional revenue.   

31. Specifically, in connection with certain transition engagements during the 

period from February 2010 through September 2011, McLellan and the State Street Co-

Schemers engaged in a pattern of fraudulent acts and practices in order to extract additional 

revenues from concealed mark-ups.  In addition to instructing his subordinates generally to 

execute the hidden mark-up scheme, in multiple instances McLellan gave specific instructions 

aimed at keeping mark-ups hidden, including what prices to charge and what levels at which 

to execute trades. 

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32. Typically, McLellan and the State Street Co-Schemers selected fixed income 

trades as the vehicle for hiding mark-ups as part of this scheme.  State Street typically did not 

disclose pricing on fixed income trading to customers, and was rarely asked for a breakout of 

pricing.  By selecting fixed income trades executed during the transition on which to take the 

mark-ups, McLellan and the State Street Co-Schemers sought to conceal the mark-ups from 

transition customers. 

33. McLellan and the State Street Co-Schemers deliberately selected certain types 

of transitions on which to perpetrate the scheme to take hidden mark-ups.  Among other 

things, McLellan and the State Street Co-Schemers selected transitions that were larger than 

others, because it was easier to hide the mark-ups amidst the large dollar amounts, and 

because these transitions were large enough that the mark-ups – even if small on a percentage 

basis – could generate substantial profits for State Street.  

34. In 2010, State Street was awarded two fixed income transitions for a 

government body responsible for management and administration of assets of a country 

located in the Middle East Region1 (the “Middle Eastern Sovereign Wealth Fund”).  The two 

transitions for the Middle Eastern Sovereign Wealth Fund had a combined value of 

approximately $6 billion.  It was on these transitions that McLellan and the State Street Co-

Schemers created and deployed the hidden mark-up scheme for the first time, beginning in 

early 2010.   

The First Middle Eastern Sovereign Wealth Fund Transition 

35. In or about March 2010, the Middle Eastern Sovereign Wealth Fund selected 

State Street to manage the first of two transitions.  This transition involved the termination of 

                                                           
1 The Commission is using generic descriptions of the Transition Management customers who were defrauded by 
McLellan and others at State Street, rather than including their names in the Complaint. 

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a fixed income portfolio of US Treasury bills and required State Street to trade in European, 

US and Canadian securities. 

36. Prior to awarding State Street the first transition, there were lengthy 

negotiations between State Street and the Middle Eastern Sovereign Wealth Fund, during 

which State Street (specifically, State Street Employee A) agreed to undertake the transition 

on a zero commission (and no fee) basis.   

37. During the negotiations, in February 2010, State Street Employee A advised 

the Middle Eastern Sovereign Wealth Fund via email that State Street preferred to charge a 

disclosed commission, but in this instance it had arranged to receive compensation “from the 

‘other side’ (the successful/winning counterparty for each individual security as chosen by us 

as your agent in a competitive bid process) … which will enable us to keep commissions for 

[the Middle Eastern Sovereign Wealth Fund] at zero.”  State Street Employee A then 

forwarded the email to McLellan.   

38. This representation by State Street Employee A was false and misleading.  

State Street’s charges would come, not from the “other side,” but from the Middle Eastern 

Sovereign Wealth Fund itself. 

39. Further, State Street Employee A represented to the Middle Eastern Sovereign 

Wealth Fund that this would amount to “only a few” basis points2 of commission and that the 

Middle Eastern Sovereign Wealth Fund would “get the best execution in the market.”   

40. The Middle Eastern Sovereign Wealth Fund asked State Street to confirm that 

“[i]n terms of quoting zero commission” State Street was in compliance with the T-Charter.  

In response, State Street Employee A made reference to a draft of the Periodic Notice, which 

                                                           
2 A “basis point” is a unit of measurement used in finance to describe one hundredth of a percentage point.  Many 
financial institutions like State Street calculate commissions and fees using basis points as the units of measurement.           

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disclosed that the source of revenue would be mark-ups included in the spread.  

41. These representations by State Street Employee A to the Middle Eastern 

Sovereign Wealth Fund were misleading.  While it was made clear to the Middle Eastern 

Sovereign Wealth Fund that State Street would be paid for the transition, it was not true that 

State Street would receive compensation from the counterparty.  In addition, the source and 

calculation of revenue was not properly disclosed.  Neither the Periodic Notice sent to the 

Middle Eastern Sovereign Wealth Fund nor the executed version disclosed that the source of 

revenue would be mark-ups included in the spread, as required for a firm complying with the 

T-Charter.  Nor did State Street disclose how commissions were calculated and collected, 

which was also a requirement of the T-Charter.   

42. When State Street was awarded the first transition for the Middle Eastern 

Sovereign Wealth Fund, State Street Employee A alerted McLellan and State Street 

Employee B, noting: “… [I]f they are bonds then we should make our quarter.”  State Street 

Employee A’s email was revealing; while the transition for the Middle Eastern Sovereign 

Wealth Fund was purportedly done by State Street for no fee, State Street Employee A clearly 

expressed that this transition would generate sufficient income from trading bonds to “make” 

the quarterly target for earnings by the Transition Management group and/or the Portfolio 

Solutions team.  In other words, State Street Employee A was acknowledging that 

commissions would be charged on fixed income trading in order to boost revenue to meet 

expectations for a particular quarter.   

43. On or about June 3, 2010, State Street Employee A advised State Street 

Employee B over the telephone that he had just spoken with McLellan about the first Middle 

Eastern Sovereign Wealth Fund transition, and passed along McLellan’s suggestion that they 

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should take 1 or 2 basis points “on the outgoing side.”  Noting that McLellan’s proposed 

hidden charges would be easy to conceal, State Street Employee A commented: “[N]o one is 

going to [expletive] notice that … It’s a rounding error[.]”  State Street Employee A also 

assured State Street Employee B that he had arranged for McLellan to be “on top of” the 

trading desk in the US to make sure they facilitated the scheme to take undisclosed mark-ups 

on trades.  State Street Employee A emphasized this point again in an e-mail to McLellan, 

telling him:  “Gonna have to be creative and need you involved on the [fixed income] trading 

desk in [the] US to ensure they do as we want.” 

44. Although McLellan was a high-ranking State Street employee who normally 

did not directly supervise the traders responsible for executing a transition, he was closely 

involved in pricing on certain US fixed income trades as part of the first Middle Eastern 

Sovereign Wealth Fund transition.  For example, between June 15, 2010 and June 18, 2010, 

McLellan communicated the client-side prices for certain US-issued bond trades to State 

Street Employee B, and then ensured that those prices were transmitted to the trading desk in 

Boston by State Street Employee B. 

45. Upon completion of the first transition, the post-trade analysis report provided 

to the Middle Eastern Sovereign Wealth Fund omitted any reference to the mark-ups that 

State Street had applied to the Middle Eastern Sovereign Wealth Fund’s trades, which 

amounted to $2.7 million, equivalent to 9 basis points.  Accordingly, State Street’s claims that 

it was in compliance with the T-Charter were misleading to the Middle Eastern Sovereign 

Wealth Fund.  

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The Second Middle Eastern Sovereign Wealth Fund Transition 

46. In or about May of 2010, State Street learned that the Middle Eastern 

Sovereign Wealth Fund would be accepting bids for a second transition, which involved the 

restructuring of a US Treasury bill portfolio valued at $4 billion and was fixed income only, 

made up of European, US and Canadian trades.  While McLellan was not directly involved in 

the bidding process for the second transition, State Street Employee A kept McLellan 

apprised Employee A of the negotiations, and McLellan guided State Street Employee A as to 

how to structure the bid. 

47. For example, in May of 2010, State Street Employee A, in preparing the pitch 

for the second Middle Eastern Sovereign Wealth Fund transition, told McLellan that a 

competitor was bidding to perform the transition for a fee of 2 basis points.  State Street 

Employee A then stated to McLellan:  “We need to find a way to charge a spread.”  McLellan 

directed State Street Employee A to bid 1.75 basis points as a flat fee and told State Street 

Employee A:  “We will make it work.”   

48. As the e-mails exchanged by McLellan and State Street Employee A the 

following day made clear, McLellan intended to “make it work” by charging hidden mark-

ups.  In an e-mail exchange on May 13, 2010, McLellan and State Street Employee A debated 

the wording of the standard Transition Management Agreement at State Street, and then 

agreed to charge a management fee and zero commission, “acting as riskless principal.” 

49. Prior to bidding for the second Middle Eastern Sovereign Wealth Fund 

transition, on August 29, 2010, State Street Employee A suggested to McLellan in an e-mail 

that State Street should “bid zero again” and McLellan replied: “Agree 100 percent.”   

50. The draft Periodic Notice provided by State Street to the Middle Eastern 

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Sovereign Wealth Fund stated as follows: “Trades will not attract any commission and will be 

priced net. The manager may benefit from a bid-ask spread.”  However, the signed version 

returned by the Middle Eastern Sovereign Wealth Fund did not contain this language.  

51. Once State Street was awarded the second fixed income transition for the 

Middle Eastern Sovereign Wealth Fund, on October 21, 2010, State Street Employee A and 

State Street Employee B exchanged emails commenting:  “Nice!” and “Back up the truck!”  

52. On or about October 21, 2010, State Street Employee A e-mailed another State 

Street employee to announce that they had won the second Middle Eastern Sovereign Wealth 

Fund transition.  When the employee asked about projected revenues, State Street Employee 

A responded:  “Back up the truck.  6 or 7 or 8.  Whatever you want.”  Shortly before the 

transition commenced, McLellan and State Street Employee A exchanged further emails 

about concealing the documents governing the transition from State Street’s legal department: 

McLellan: Did they [e.g., the legal department] look at the original 
agreement? 
 
State Street Employee A: “Absolutely not. Nor did they look at the 
periodic notice.  This can of worms stays closed!” 
 
“[By the way]- there is no way we can disclose our spread.” 
 
McLellan: “Agreed.” 
 

53. Shortly after the second transition for the Middle Eastern Sovereign Wealth 

Fund was awarded to State Street, McLellan again directed the trading strategies and 

suggested charging an 18 basis point markup on one trade in particular.   

54. In order to disguise the mark-ups which State Street expected to charge the 

Middle Eastern Sovereign Wealth Fund, the pre-trade estimate analysis report added a 

fictitious figure, which was labeled a “market impact” estimate.  This so-called “market 

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impact” estimate of $5 million was moved from the estimate of the bid-ask spread by State 

Street’s Transition Management employees on instructions from Portfolio Solutions senior 

management.  This presentation of the trading costs concealed the amount of the mark-up 

which State Street expected to charge the Middle Eastern Sovereign Wealth Fund. 

55. State Street’s earnings for the second transition were included in the market 

impact and bid-ask spread costs, instead of being separately listed, thus obscuring the amount 

charged by State Street on this transition from the Middle Eastern Sovereign Wealth Fund.  

The total costs listed in the post-trade analysis report include $4.7 million for market impact, 

which was misleading, since that number incorporated the earnings made by State Street from 

the hidden mark-ups which State Street had applied to the Middle Eastern Sovereign Wealth 

Fund’s trades. 

56. In total, State Street charged approximately $9.7 million in hidden mark-ups 

for the two Middle Eastern Sovereign Wealth Fund transitions.  

December 2010:  McLellan and Others Effect the Scheme to Defraud  
on an Irish Government Agency 

 
57. On or about December 10, 2010, State Street was awarded a transition for a 

government agency that managed the assets and liabilities of the government of the Republic of 

Ireland, including the national debt and pension reserves (the “Irish Government Agency”).  The 

transition involved both fixed income and equities trading (including US trading).  The transition 

was valued at approximately 4.7 billion Euros, and was effected by State Street in three separate 

stages (or “tranches”).   

58. As part of the scheme to defraud State Street’s customers, McLellan and the 

State Street Co-Schemers charged the Irish Government Agency hidden mark-ups for the equity 

and fixed income trades that were conducted as part of the transition. 

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59. In November of 2010, McLellan and the State Street Co-Schemers began 

discussing the bid for the Irish Government Agency transition.  During those discussions, 

State Street Employee A e-mailed McLellan to stress the importance of winning the 

transition, exclaiming:  “Gotta win this one!  Any ideas how to get more revenue would be 

appreciated.”  State Street Employee A then suggested to McLellan that State Street propose a 

1 basis point management fee with “no commissions, and then take a spread[.]”   

60. McLellan supervised State Street Employee A, and advised him about how to 

structure the bid to win the Irish Government Agency transition.  Specifically, McLellan told 

State Street Employee A:  “Agree with a zero commission bid.”  State Street Employee A 

replied: “Great minds think alike.  We have to charge [a] fee … otherwise they get 

suspicious[.]”  State Street Employee A later e-mailed State Street Employee B:  “Fees: 1.25 

[basis points].  No commissions.  Just to clarify – 1.25 bps is the management fee.  The extra 

quarter point makes it look like we actually thought about it and did the calculations.”   

61. The Irish Government Agency eventually agreed to pay a fixed management 

fee of 1.65 basis points, as set out in the Transition Notice, and subsequently, State Street 

reduced that fixed fee to 1.25 basis points for the third tranche.  Meanwhile, McLellan and the 

State Street Co-Schemers continued to hone their scheme to extract hidden fees from the Irish 

Government Agency transition.  Through e-mail communications in late December 2010, 

State Street Employee A and McLellan worked out the specifics of their plan to charge hidden 

trading fees to the Irish Government Agency:  

State Street Employee A:  “need to be very creative here”  
 
McLellan:  “we will.” 
. . . 
State Street Employee A:  “Here’s what I think we should do with our 
new best friends[…]: - 1.65bps for the privilege of working with us […] 

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- 10-12 bps out of FI [fixed income]– 3bps spread out of US equity and 
global small cap – trade all global em (sic) mkt net through brokers – 
organise with FX [foreign exchange] to collect 5bps for trading back to 
euro. Perhaps the FX bit needs a discussion upfront involving you and 
[an individual from SSGM Sales Trading Research], but we HAVE to 
show revenue in our numbers”. 
 
McLellan:  “. . . Fx won’t be a problem.” 
 

62. In addition to the disclosed management fee, McLellan and the State Street 

Co-Schemers charged the Irish Government Agency hidden commissions on the equity trades 

on both the first and third tranches, and charged hidden mark-ups on the fixed income trades 

across all three tranches.   

63. In order to conceal the hidden commissions added to the Irish Government 

Agency’s equity trades, and in furtherance of this scheme, McLellan and the State Street Co-

Schemers directed that the relevant trades be booked through a trading account that State 

Street normally used for non-Transition Management business to provide an average price to 

customers for a day’s trading.  At the direction of McLellan and the State Street Co-

Schemers, employees extracted trade data from the trading records, added commissions, and 

then uploaded the adjusted equity prices into the trading records.  Through this back-door 

method of booking the trades, McLellan and the State Street Co-Schemers intentionally hid 

the commissions they had added to the equity trades executed on behalf of the Irish 

Government Agency. 

64. Contrary to their representations, which were set forth in the State Street 

agreement with the Irish Government Agency, McLellan and the State Street Co-Schemers 

also directed the trading desks to apply mark-ups to fixed income trades.  These instructions 

directly contradicted written instructions to traders not to charge commissions for fixed 

income on transitions.  

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65. When the application of mark-ups on fixed income trades was questioned by a 

State Street employee in Boston, he was informed by State Street Employee A via e-mail on 

February 24, 2011: “[I]ts on a need to know basis… speak with Ross [McLellan], who knows 

the strategy here.”  State Street Employee A’s e-mail was then forwarded to McLellan by a 

managing director, who asked McLellan:  “Care to share?  I want to make sure I tell Finance 

the right amount to accrue, [as it] looks like we are recognizing revenues on the fixed income 

and futures.”   

66. Throughout all three tranches of the transition for the Irish Government 

Agency, McLellan monitored and guided the scheme to take hidden mark-ups.  On March 16, 

2011, McLellan received documents for the second tranche of the transition, which stated that 

“zero comm[ission]s” were taken.  McLellan forwarded the documents to State Street 

Employee A via email, and asked if State Street Employee A was “giving [expletive] away?”  

State Street Employee A responded:  “Have I ever let you down on [fixed income?]” 

67. Under the terms of its contract with the Irish Government Agency, State Street 

earned a contractual fee for the transition totaling approximately $1,634,085.  In addition, 

through the fraudulent acts and practices of McLellan and the State Street Co-Schemers, State 

Street took additional revenue of approximately $3.7 million from the hidden mark-ups and 

commissions.  

February 2011:  McLellan and His Co-Schemers Defraud a British Postal Company 
 

68. In early February 2011, State Street learned of an opportunity to bid on a £1.3 

billion (British Pounds) transition for a postal service company that provides mail collection 

and delivery services throughout the United Kingdom (the “British Postal Company”).  The 

transition was fixed income only, and comprised of both European and US trades.  On 

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February 3, 2011, State Street Employee A e-mailed McLellan, noting that the potential bid 

was “[c]onfidential but… gotta win that one!”  In response, McLellan told State Street 

Employee A:  “Thin to win.”  This reflected McLellan’s and his co-schemers’ strategy of 

winning bids by proposing very low (“thin”) fees and then making the deals profitable by 

adding hidden commissions after they won the business. 

69. In February 2011, the British Postal Company awarded the transition to State 

Street.  State Street’s Transition Notice advised the British Postal Company that a fixed fee of 

1.75 basis points “on the value of the portfolio” would be charged.  State Street’s total agreed 

fee was $922,107. 

70. The British Postal Company specifically sought confirmation that the fixed fee 

was the “full and final transition fee including all buying and selling required.”  State Street 

Employee A confirmed in writing that “the fee includes all trading required.”  To enhance the 

impression that the deal was unfavorable for State Street he added,   “Don’t make me go this 

low every time though!”  

71. State Street Employee A’s e-mail to the British Postal Company was false and 

misleading.  In fact, McLellan and the State Street Co-Schemers intended to charge the 

British Postal Company hidden mark-ups on the transition.  On February 21, 2011, McLellan 

praised State Street Employee A for winning the bid with the British Postal Company, saying 

“Nice work.”  State Street Employee A immediately replied to McLellan by saying: “I am 

thinking 1.5-2bpy [basis points]”.  

72. McLellan gave explicit instructions to the trading desk in Boston to ensure that 

– as Employee A proposed – commissions were charged on the British Postal Company 

transition trades, contrary to the express representations to the customer that there would be 

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no such charges.  This meant that McLellan had to override the internal written instructions 

that had been supplied to the State Street trading desk, based on the agreement with the 

British Postal Company.  In one such call, McLellan told the trader: “On the [transition…] 

that came in yesterday, you can actually take a basis point of yield on those.”  As the 

conversation continued, McLellan directed the trader to disregard prior trading instructions 

from others at State Street not to charge any commissions: 

 Trader:  Okay.  One [basis point]?  Got it. 
 
 McLellan:  All right.  I will catch up later. 
 

Trader:  I was just actually on a chat with [another State Street employee].  She 
was just telling me, don’t charge any commissions, so I was just going to – I 
am going to take your word and just go with it. 
 

 McLellan:  Yes, I just talked to [State Street Employee A]. 
 
 Trader:  Awesome.  All right, I will do one [basis point]. 
 
 McLellan:  Thanks, bye.  Thanks pal. 
 
73. Beyond directing the trading desk to apply hidden mark-ups to US trades, 

McLellan also instructed State Street employees to conceal the commissions on 

documentation sent to the British Postal Company.  In February 2011, McLellan spoke to the 

same trader in Boston, asking whether he was “backing out” the British Postal Company 

(meaning, deleting commissions from documentation).  The trader confirmed that he was 

“doing it right now” as McLellan inquired about “corporate spreads” and confirmed that the 

transition was “hedged with futures.”  McLellan then instructed the trader:  “All right.  Stay 

with the BPS basis point of yield, then.”  The trader assured McLellan that he would delete 

any reference to commissions charged in the file for the British Postal Company transition – a 

file that would go first to State Street compliance, and then to the transition customer:  “Yes, 

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definitely.  And I am zeroing out those commissions when I send over the file.”   

74. Similar to the instructions sent to State Street’s trading desk in the United 

States, the trading instructions sent to State Street’s UK trading desk for the British Postal 

Company transition stated “Comms: ZERO COMMS” (which meant that no mark-up should 

be applied to the trades).  This was consistent with the contractual documentation for the 

British Postal Company transition.  In practice, however, an average mark-up of 1 basis point 

was applied to US trades, and an average mark-up of 2 basis points was applied to European 

trades.  

75. As with the Middle Eastern Sovereign Wealth Fund, McLellan and his co-

schemers concealed the mark-ups in the transition reports sent to the British Postal Company.  

Among other things, the initial pre-trade analysis report included an undisclosed mark-up of 

1.75 basis points in the “bid-ask” spread line of the initial pre-trade analysis report.  This was 

reduced to 0.75 basis points in the final pre-trade analysis report sent to the British Postal 

Company. 

76. The transition results reported to the British Postal Company were almost 

identical to the estimate in the pre-trade analysis report, but again, hidden within the “bid-ask” 

spread line was more than $3 million of revenue taken by State Street as a result of the hidden 

mark-ups which had been applied. 

 Additional Misconduct by McLellan and Others at State Street 

77. In addition to the transitions for the Middle Eastern Sovereign Wealth Fund, 

the Irish Government Agency and the British Postal Company, McLellan and the State Street 

Co-Schemers engaged in fraudulent acts and practices in several other large-scale transitions 

at State Street between February 2010 and September 2011, including (but not limited to) a 

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transition for a UK-based pension fund for an ₤850 million (British Pounds) bond portfolio, a 

€1.6 billion (Euros) transition in the Netherlands that required the restructuring of the Euro-

denominated fixed income portfolios of two pension funds, and a €1 billion (Euros) global 

equities and fixed income transition for a telecommunications agency in the Republic of 

Ireland. 

78. State Street earned additional revenue of at least $3 million from the hidden 

mark-ups on other transactions for the above-described Transition Management customers. 

C. Discovery and Cover-up of the Overcharging Scheme 
 

79. On June 21, 2011, the British Postal Company contacted State Street 

Employee 1, asking if the fee of 1.75 basis points (plus commissions for futures execution) 

was “the sole revenue for [State Street] and/or any of its affiliates on this event.”   

80. State Street Employee A falsely confirmed tha t  the British Postal Company’s 

understanding was correct, despite knowing that undisclosed mark-ups had been taken on 

the fixed income trades.  The British Postal Company responded by noting that their own 

consultant, using publicly available bond pricing information in the US, had identified 

mark-ups on certain US fixed income trades which had not been disclosed. 

81. State Street Employee A initially sought to stave off further inquiry from the 

British Postal Company, replying by e-mail that it “doesn’t seem right,” despite his 

knowledge that hidden mark-ups had been deliberately applied to the trades.  However, the 

British Postal Company persisted in raising their concerns about the hidden mark-ups on 

transition trades by State Street. 

82. In or about June 2011, McLellan, State Street Employee A, and State 

Street Employee B participated in a meeting, during which McLellan explicitly 

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proposed lying to the British Postal Company – to wit, that State Street’s 

undisclosed mark-ups were the result of a “fat finger mistake” (essentially a clerical 

or typing error) and that they only occurred on US-based trades.  As McLellan, State 

Street Employee A, and State Street Employee B well knew, they had intentionally taken 

hidden mark-ups on this transition, and those hidden mark-ups were not the result of 

any “fat finger mistake” or any kind of inadvertence.  Nonetheless, the co-schemers 

agreed with McLellan that they should make the following misrepresentation to The British 

Postal Company: 

“our trading desk in the US has erroneously applied commissions of 1 bp of yield to 

trades that should have gone through at zero commission.” 

State Street Employee A also sent an e-mail to the British Postal Company, stating that the 

markup taken on US trades was a “fat finger error.”  As State Street Employee A (and 

McLellan) knew, both of these statements were misrepresentations, since the mark-ups were 

taken intentionally.   

83. McLellan, by directing the State Street Co-Schemers to lie to the British Postal 

Company, aided and abetted material misrepresentations by the State Street Co-Schemers. 

84. McLellan proposed that a third party calculate the shortfall and refund owed to 

the British Postal Company as a result of the undisclosed mark-ups on US-based fixed income 

trades.  At the direction of McLellan and others, State Street agreed  to  rebate the British 

Postal Company approximately $1 million for the mark-ups that had been applied to the US 

trades, again describing them in words suggested by McLellan:  

“inadvertent commissions.” 

85. In order to avoid drawing attention from State Street’s compliance or legal 

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personnel, McLellan and others at State Street circumvented the usual processes and 

procedures to reimburse the British Postal Company without recording the repayment in State 

Street’s loss event tracking system.   

86. While arranging to reimburse the British Postal Company, McLellan 

continued to conceal not only the fact that mark-ups on US trades were taken intentionally but 

that State Street deliberately took hidden mark-ups on the British Postal Company’s 

European trades, resulting in additional revenue of approximately $2 million. 

  

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CLAIMS FOR RELIEF 

First Claim for Relief 

Antifraud Provisions of the 
Securities Act 

[Violation of Section 17(a) 
of the Securities Act] 

 
1. The Commission repeats and incorporates by reference the allegations in 

paragraphs 1 through 86 above. 

2. By engaging in the conduct described above, Defendant Ross McLellan has, 

directly or indirectly and singly or in concert, acting intentionally, knowingly or recklessly, by 

use of the means or instruments of transportation or communication in interstate commerce or 

by the use of the mails, in the offer or sale of securities, employed devices, schemes, or 

artifices to defraud, and/or engaged in transactions, acts, practices or courses of business 

which operated or would have operated as a fraud or deceit upon purchasers of securities.   

3. By engaging in the conduct described above, McLellan has directly or 

indirectly and singly or in concert, violated, and unless enjoined will continue to violate, 

Sections 17(a)(1) and 17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)]. 

  

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Second Claim for Relief 

Antifraud Provisions of 
the Exchange Act 

[Violation of Section 10(b) 
of Exchange Act and Rule 

10b-5 By McLellan] 
 

4. The Commission repeats and incorporates by reference the allegations in 

paragraphs 1 through 86 above. 

5. By engaging in the conduct described above, Defendant Ross McLellan has, 

directly or indirectly and singly or in concert, acting intentionally, knowingly or recklessly, in 

connection with the purchase or sale of securities, by use of the means or instrumentalities of 

interstate commerce or the mail, employed devices, schemes, or artifices to defraud, and/or 

engaged in transactions, acts, practices, or courses of business which operated or would have 

operated as a fraud or deceit upon purchasers of securities and upon other persons. 

6. By engaging in the conduct described above, McLellan violated Section 10(b) 

of the Exchange Act [15 U.S.C. § 78j(b)] and Rules 10b-5(a) and (c) thereunder [17 C.F.R. § 

240.10b-5]. 

  

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Third Claim for Relief 

Antifraud Provisions of 
the Exchange Act 

[Aiding and Abetting 
Violation of Section 10(b) 
of Exchange Act and Rule 

10b-5 By McLellan] 
 

7. The Commission repeats and incorporates by reference the allegations in 

paragraphs 1 through 86 above. 

8. By engaging in the conduct described above, Defendant Ross McLellan has, 

directly or indirectly and singly or in concert, acting intentionally, knowingly or recklessly, in 

connection with the purchase or sale of securities, by use of the means or instrumentalities of 

interstate commerce or the mail, made untrue statements of material fact or omitted to state 

material fact(s) necessary to make statements made not misleading in light of the circumstances 

under which they were made. 

9. McLellan knowingly or recklessly provided substantial assistance to others at 

State Street’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 

10. By engaging in the conduct described above, McLellan aided and abetted 

violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5(b) 

thereunder [17 C.F.R. § 240.10b-5]. 

  

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PRAYER FOR RELIEF 
 

WHEREFORE, the Commission requests that this Court: 
 

A. Find that McLellan committed the violations alleged in this Complaint; 

B. Enter a permanent injunction restraining and enjoining McLellan and each of 

his agents, servants, employees and attorneys and all persons in active concert or 

participation with him who receive actual notice of the injunction by personal service or 

otherwise, including facsimile transmission or overnight delivery service, from future 

violations of, and aiding and abetting future violations of, Section 17(a) of the Securities Act 

[15 U.S.C. §77q(a)], and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)], and Rule 

10b-5 thereunder [17 C.F.R. § 240.10b-5]; 

C. Order McLellan to disgorge the ill-gotten gains he received as a result of his 

violation of the federal securities laws, plus pre-judgment interest thereon;   

D. Order McLellan to pay civil monetary penalties pursuant to Section 20(d) of 

the Securities Act [15 U.S.C. §77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. 

§ 78u(d)(3)]; 

E. Retain jurisdiction over this action to implement and carry out the terms of all 

orders and decrees that may be entered; and 

F. Award such other and further relief as the Court deems just and proper.   
 
  

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JURY DEMAND 
 

The Commission hereby demands a trial by jury on all claims so triable. 
 
 

Respectfully submitted, 
 

SECURITIES AND EXCHANGE COMMISSION 
 

By its attorneys, 
 
/s/ Rua M. Kelly                                                  
Eric Heining (Mass. Bar No. 664900) 
Rua M. Kelly (Mass. Bar No. 643351) 
Benjamin Mack (Mass. Bar No. 661590) 
33 Arch Street, 24th Floor 
Boston, MA  02110 
(617)-573-8941 (Kelly direct) 
(617)-573-4590 (facsimile) 
Email:  [email protected] 

 
Dated: May 13, 2016 

 

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