State Street Fined £23m by UK Regulator over Transition Management

(January 31, 2014) — State Street has been hit with a £22.9 million penalty charge after acting “with complete disregard for the interest of its customers,” the UK’s Financial Conduct Authority (FCA) announced today.

The fine was levied on the global financial giant over activities in its transition management department in that were revealed in 2011.

“State Street UK’s transitions management (TM) business had developed and executed a deliberate strategy to charge clients substantial mark-ups on certain transitions, in addition to the agreed management fee or commission,” the FCA said. “These mark-ups had not been agreed by the clients and were concealed from them.”

Clients that were overcharged included the Royal Mail Pension, Ireland’s National Pension Reserve Fund, and the Kuwait Investment Authority. Clients were all refunded the fees they had overpaid, the amounts of which totalled more than $20,000,000.

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“The findings we publish today are another example of a firm that has acted with complete disregard for the interests of its customers,” said Tracey McDermott, director of enforcement and financial crime at the FCA. “State Street UK allowed a culture to develop in the UK TM business which prioritised revenue generation over the interests of its customers. State Street UK’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected. Their conduct has fallen far short of our expectations. Firms should be in no doubt that the spotlight will remain on wholesale conduct.”

Following the discovery of the overcharging, State Street dismissed several of its employees that had taken part in the activity. Ross McLellan, who led the team and his deputy Ed Pennings left the firm, with Pennings taking State Street to an employment tribunal for unfair dismissal in November 2012. He claimed the State Street hierarchy were fully aware of the team’s actions. This was refuted by State Street. A year ago, the judge concluded that State Street had dismissed Pennings unfairly, but only due to failings in the process carried out by the human resources department. He said that Pennings’ conduct had warranted dismissal but the bank’s actions during the process had complicated the affair. The tribunal did not award Pennings any damages.

A further tribunal brought by former TM team member Rick Boomgaardt was withdrawn a month later after an undisclosed out of court settlement was agreed.

The FCA said it viewed “State Street UK’s failings to be at the most serious end of the spectrum. State Street UK acted as an agent to its TM clients and held itself out as being a trusted advisor. Accordingly, it breached a position of trust. Further, the overcharging accounted for over a quarter of its TM revenue”.

The event propelled the FCA to tackle the industry more widely with a full investigation.

In October 2013, Clive Adamson, director of supervision at the FCA, gave his views on the transition management industry and its failings: “Poor transparency and opaque legal documentation could lead to poor consumer outcomes in the provision of this service.”

Over the past 12 months, JP Morgan has closed down its transition management business for all areas outside Australia and Credit Suisse acted likewise—neither had been revealed to have committed any wrongdoing.

State Street agreed to settle at an early stage of the FCA’s investigation, and qualified for a 30% discount on its fine. The original amount had been set at £32,692,800.

In a statement, the company said: “Today brings to a conclusion the FCA’s inquiry into the overcharging of six EMEA-based transition management clients in 2010 and 2011 that we self-reported in 2011. We deeply regret this matter. Over the past several years, we have worked hard to enhance our controls to address this unacceptable situation. The FCA in its notice is critical of our business controls within the UK transition management business and our control functions in the UK at that time. We acknowledge these as historical problems and have undertaken extensive efforts to address both, including strengthening the controls, procedures and governance within our UK transition management business.”

In January 2012, State Street brought on board former JP Morgan transitions guru John Minderides to reform and lead the State Street transitions team.

One of Singapore’s sovereign wealth fund has claimed the drugs company made misleading statements on two anti-cholesterol drugs, artificially inflating the share price.

(January 30, 2014) — GIC has filed a fraud claim against one of the world’s largest drug companies, claiming it misled the market on two statin drugs, pushing the price of the stocks up as a result.

In particular, GIC has accused Merck and subsidiary Merck-Schering-Plough, the makers of cholesterol-lowering drugs Zetia and Vytorin, of failing to tell the market about the “unqualified disaster” results of clinical trials, which found both drugs had no additional benefit to slowing the progression of arteries being clogged up by high cholesterol levels.

The case relates to a 15-month investment period between December 6, 2006 and March 28, 2008, during which GIC bought millions of shares in Merck, according to court documents filed at New Jersey’s district court.

The clinical trials for the drugs were completed in 2005 and early 2006, before GIC’s investment period, but the manufacturers deliberately delayed the results from hitting the market, according to GIC.

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By 2007, the plaintiffs alleged, certain medical internet forum members were suggesting that the drug companies knew the results “were a bust”, but the general public could not know about this until 2008, when specific studies mentioned in the posts were substantiated by Merck and Schering-Plough.

The plaintiffs then alleged that the drug companies deliberately attempted to change the primary goal of the drugs at the clinical trial, skewing the results to focus on the site of the arterial wall most favoured by Vytorin. The companies were later forced to abandon this idea when the medical regulator FDA and Congress came down hard on them.

After Congress became involved, and news of a congressional investigation into the defendants’ withholding of data surrounding the drugs hit the media, Merck’s share price began to drop from $60.55 on January 11, 2008 to $47.79 on January 25, wiping out $25 billion of Merck’s capitalisation.

When Merck revealed the full results of the clinical trial on March 20, 2008, the share price fell further still, closing at $37.95 on March 31, 2008. This marked a 38% drop in share price from the January highs of more than $60 a share.

GIC argued the delay in the release of these results allowed Merck to reap “hundreds of millions of dollars” in sales of Vytorin which would not have been made had the public known the details earlier.

A similar situation occurred with the other drug Zetia, where trials proved that when it was combined with Zocor (another drug), there was no additional benefits in terms of removing more arterial plaque.

Two individuals are also being sued, Richard Clark, the chairman of the board at Merck from April 2007 to December 2011, and Deepak Khanna, senior vice-president of the Merck-Schering-Plough joint venture. Merck acquired Shering-Plough in 2009. Today it is known as Merck and Co.

GIC alleged these two people wielded power within the organisations, had access to information before the public, and profited from being able to sell their shares at a higher price before the news of the trials became public.

“Merck insiders”, as the legal filing termed them, collectively made $26 million by selling their shares before the results of the trial were publically released, and Clark himself sold $2 million worth of shares in May 2007, having had no previous history of selling shares in the company.

Kirby McInerney, the legal counsel for GIC, has demanded a jury trial for undisclosed damages caused to the sovereign wealth fund.

Merck could not be reached for comment at the time of going to press.