Ex-Employee Claims Overcharging Was “Accepted Business Practice” at State Street

A lawyer for Edward Pennings, formerly of the bank’s transition management unit, said his client was only following standard practices; State Street vigorously disputes the claim, labeling the dismissed employee a “liar.”

(November 27, 2012)—A lawyer for ex-State Street transition manager Edward Pennings has claimed in an East London Employment Tribunal that his client was following “accepted business practices” when overcharging occurred with multiple European pension clients.

Pennings, along with two others, were dismissed from State Street in 2011 when it was revealed that the Royal Mail pension plan was overcharged for a transition. The Sainsbury’s and Irish national pension plans were also overcharged, it was later revealed. State Street charged clients an undisclosed commission in addition to the agreed-upon management fee, an audit by the Irish government determined.

“This was an accepted business model, therefore [Pennings] had to defend the business model and the bank,” Jeffrey Bacon of law firm Littleton Chambers told the Tribunal. He added that Pennings was in “an impossible position” and that State Street’s refusal to look at the wider context of his actions was a mistake. “The wider context was crucial to this case,” he stated.

Bacon accused State Street of mishandling an internal investigation into Pennings’ conduct, asserting that the bank “took no steps to go to those people who were involved, including Ross McLellan, to ask them whether this was an approved business model.” McLellan was Pennings’ superior in Boston, and was also dismissed late last year.

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State Street Responds

State Street, in the form of Executive Vice President Richard Lacaille, responded that Pennings was fired for “lying” to the client. Lacaille was the disciplinary manager overseeing the initial internal hearing regarding Pennings’ conduct in October 2011. That hearing led to Pennings being dismissed shortly after.

Pennings “had a business model that he believed he was basically required to lie to your clients,” Lacaille told the Tribunal. “I disagreed.” Lacaille also stated that he did not think Pennings’ business model “did exist as an authorized, legitimate business model” within State Street.

“However, it was the lies that were by far the most important issue,” Lacaille added. “I spoke to Ed Pennings during his disciplinary hearing and there was a very clear set of evidence that he lied to his client.”

Lacaille also mentioned that others seemed to know of Pennings actions. “Clearly, other people were involved because he [Pennings] was involved in correspondence with McLellan,” he said. “Ross McLellan was certainly knowledgeable about the business model.”

Yet fault still lies with Pennings, Lacaille said. “Whether or not the business model was approved, the dismissal was based on the fact that he lied,” he said. “I think the idea that he lied to [the client] and continued, in a way, to conceal it is just not acceptable.”

According to Lacaille, the investigation gave him a “liberal mandate and I could talk to anyone I needed to” within the bank. In response to Bacon’s assertions that the bank failed to look at the wider context, Lacaille asserted: “I wasn’t asked to judge whole swathes of the organization. I was asked to judge one person.”

When contacted for comment following the day’s hearing, a State Street representative gave the following statement to aiCIO: “Mr. Pennings’ actions fell seriously short of the standards and conduct expected of any employee at State Street and we have zero tolerance for this. We have addressed the issues directly with the clients that were impacted. We are disappointed that Mr. Pennings has been unable to take responsibility for his behavior and that he has chosen this current course of action.”

During the investigation, Pennings’ codename was “Parker.”

Much of the first day of the Tribunal was spent debating procedural motions and evidence presentation. It is expected to continue for the rest of the week.

Additional reporting from London by aiCIO Contributor Lucy Pawle.

The Organisation for Economic Cooperation and Development (OECD) sees 2013 global growth of 2.9%, down from 3.4%, so how will that impact institutional investors?

(November 27, 2012) — The Organization for Economic Cooperation and Development (OECD) has slashed its global economic forecasts, highlighting the risks of a “major” global recession.

“After five years of crisis, the global economy is weakening again,” OECD Chief Economist Pier Carlo Padoan said today in the organization’s semi-annual Economic Outlook. “The risk of a major contraction cannot be ruled out.”

According to the Paris based think-tank’s report, GDP growth across the OECD is projected to match this year’s 1.4% in 2013, before gathering momentum to 2.3% for 2014. In the United States, assuming the “fiscal cliff” is avoided, GDP growth is projected at 2% in 2013 before rising to 2.8% in 2014. In Japan, GDP is expected to expand by 0.7% in 2013 and 0.8% in 2014. “The euro area will remain in recession until early 2013, leading to a mild contraction in GDP of 0.1% next year, before growth picks up to 1.3% in 2014,” the report said.

“Additional easing is required in the euro area, Japan and some emerging market economies, including China and India,” Padoan said. “If serious downside risks were to materialize, further policy support would be essential,” including additional quantitative easing and temporary fiscal stimulus by countries “with robust fiscal positions, including Germany and China.”

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Another OECD report released in July of last year similarly questioned the recovery of the global economy, noting that while pension assets had returned to pre-crisis levels, full recovery remained uncertain. The OECD asserted that pension funds faced numerous challenges and risks, such as accounting and regulatory changes. The report also showed that six OECD countries had not seen assets recover in local-currency terms. Those countries consisted of Belgium, where assets were 10% lower than in 2007; Ireland, 13%; Japan, 8%; Portugal, 12%; and Spain and the US, which were both down by 3%.

The implication for institutional investors, according the consultants from Hewitt EnnisKnupp, is a pursuit of alternative investments–such as hedge funds, private equity, and real estate–among mainly public pensions along with endowments and foundations. Corporate pension schemes are often in a derisking phase, and are thus focusing their alternatives allocation in more liquid areas, such as hedge funds, according to Mike Sebastian, a partner at Hewitt EnnisKnupp. “Less liquid alternatives is still not an area institutional investors can build exposure to very quickly.

He continued: “We’re seeing investors becoming more and more concerned about the prospects for equities–they’re between a rock and a hard place,” he said. “Due to geopolitical and other risks on top of weak bond market prospects, clients are reacting in two main ways: 1) diversifying away from equity risk, or 2) becoming more dynamic.”

So what’s the way for investors to be most successful with alternatives? Clients who can tolerate the cost, complexity, and illiquidity should consider opportunity-type allocations of 40% of their return-seeking assets to private equity, non-core real estate, and hedge funds, Sebastian told aiCIO in August. “For endowments and foundations, they’re already there, but for public pensions, this could be a significant change,” he said, referring to one of his latest papers titled “Go Big or Go Home: The Case for an Evolution in Risk Taking.”

Sebastian responded to the OECD’s most recent outlook by adding that while the US fiscal cliff situation is a major concern, he is hopeful for a resolution. “Even if the fiscal cliff situation is resolved (and we think it will be), the impact on the bond market will be eroded. The implications on the US market’s future ability to repay debts and manage the fiscal situation is dependent on parities getting together and resolving longer term issues.”