Ross McLellan was hungover the morning he was arrested for securities fraud.
It was April 5, 2016. The night before, Villanova had beaten North Carolina in the NCAA basketball title game. McLellan “had a few cocktails watching it” before going to bed at 1:00 a.m. Up early the next morning, he donned jeans and a Vineyard Vines long-sleeve before driving his twins to their preschool in Hingham, Massachusetts, a commuter town about ten miles southeast of the city of Boston. He then proceeded to the office of Harbor Analytics, the company he had founded after being fired from financial giant State Street in 2011. McLellan parked his SUV behind the office, located in a converted house, and went inside.
“It’s a typical Boston morning,” he remembers. “It’s 34 degrees, and my office is right near the water in Hingham Harbor, so it’s whipping 30 knots, freezing.” He had a 9:00 a.m. meeting at a coffee shop only a quarter-mile away, but decided to drive, given the weather. He exited the building.
McLellan does not believe they had their guns drawn. He is certain that as he stepped into the parking lot, eight FBI agents moved toward him. At least one was wearing an FBI pullover. “They grab me. They’re like, ‘Do you have any sharp objects in your pockets?’”
He snickered. “I’m like, ‘I think I’ve got a fucking pen in there.’” Agents handcuffed him, put him in a car, and began the traffic-snarled drive to Boston’s John Joseph Moakley United States Courthouse.
That was four years ago. McLellan has since been tried and convicted, lost an appeal, and, on July 7, said goodbye to his wife and four young children to report to federal prison in Ayers, Massachusetts, to serve out an 18-month sentence. The crimes he was convicted of — overcharging clients by millions as a young executive at State Street and conspiracy to do so — occurred nearly a decade ago. McLellan is inmate no. 99476-038.
He did not testify at trial. However, in the weeks preceding his incarceration, McLellan agreed to a series of extensive interviews with Institutional Investor. By turns boisterous, despondent, humorous, abrasive, charming, and frustrated, he does not deny that he made mistakes, and that his crimes are no longer alleged. Yet McLellan still vehemently believes that despite evidence in his favor, he was convicted by the government and railroaded by a corporation intent on protecting its own, a corporation he thinks is hiding an email that would exonerate him — if not legally, then morally.
And moral exoneration seems to be exactly what Ross McLellan is looking for.
But first, the crime.
According to the U.S. federal government and 12 Suffolk County jurors, McLellan is guilty of conspiracy, securities fraud, and wire fraud. The government alleged, and the jury found credible, that McLellan and a small group of accomplices tacked “secret commissions” onto trades and then “took steps to conceal the scheme” while working in Boston-based State Street’s transition management business in the years immediately following the global financial crisis.
As is so often the case with financial crimes, the details are tediously complex. Transition management, at its core, is a transaction business: Like a family trying to move houses, investors frequently sell large pools of assets in order to buy others. To do so they hire State Street or one of its competitors to buy and sell on their behalf. It may seem mundane, but when the things being bought and sold are valued in billions, there is money to be made. According to the government, McLellan and his conspirators made immense amounts of money for State Street by charging overseas clients fees that were not disclosed. “The issue here is you can’t lie,” U.S. District Judge Leo Sorokin, who oversaw the trial, said at sentencing. “Truth matters. You can’t tell people you’re going to charge them one thing and charge another.”
McLellan, along with U.K.-based subordinates Edward Pennings and Richard Boomgaardt, defrauded six European and Middle Eastern investors in the scheme. Both underlings would eventually plead guilty and testify against their former boss.
But it was one client — the Royal Mail Pension Plan, which pays the retirements of Britain’s postal workers — that ultimately led to the trio’s downfall.
In February 2011 the pension fund was looking to transition a large portfolio of bonds. In an email on the 21st of that month to Ian McKnight, the chief investment officer at Royal Mail, Pennings — McLellan’s man in London — confirmed that “we can do this project for a management fee of 1.75 bps of the portfolio value of £1.3bln or £227,500.”
McKnight responded, asking for clarification. “For the avoidance of doubt can you confirm this is your full and final transition fee including all the buying and selling required by my trades?”
Pennings confirmed. “The fee includes all trading required.”
It did not. Pennings did not tell McKnight that he planned to add secret charges to the transition, a scheme hardly more complicated than the following scenario:
Say you want to buy a house, and you hire a real estate agent to help you. She says she can get you your dream home for $100,000, plus a fee of $5,000. But what the agent doesn’t tell you is that her firm has already bought the house for $90,000. They still take their fee, but as they already own the house, they actually make $15,000, not $5,000 — and you, a happy new homeowner, are none the wiser. You think she has been acting as your agent, but in reality, she was simply acting as a middleman who takes no risk — a riskless principal, in financial terms.
With that lie, State Street won the business. Eventually, McKnight and Royal Mail got wind that State Street had, in fact, made much more than £227,500, at the expense of thousands of retired postal workers. A cover-up ensued. A refund was given. At least five more instances of hidden charges were discovered. State Street fired McLellan and others as it tried to rid itself of the rogue employees who had brought shame, and more than $100 million in fines, upon the 220-year-old bank. McLellan would remain free for more than five years, until he was rightly arrested on that freezing day in Hingham.
At least, that’s how the world sees it. McLellan looks at it differently.
Ross McLellan was born on the south side of working-class in Warwick, Rhode Island, on February 17, 1972, the third and last child of Jack and Dawn, a sporadic employee of an electrical company and a homemaker.
“We weren’t well off,” McLellan says. “I got two pairs of Toughskin cords every September and had to make them work, and I got one pair of Nikes and they had to last until May. If you wanted new sports equipment, you got a job.”
But he takes pains to stress that he was happy. “I mean, I had two parents that gave a shit about me. I had a bike, played baseball, soccer, whatever else was out there. They made enough to scrape by and gave us a life. It’s not that my parents were bad people; they just didn’t have any money.”
Poverty’s impact cut deep. Now with a wife — who has stuck with him through his conviction — and children of his own, McLellan is open about his goal when growing up: “I didn’t want to be poor. I didn’t want my kids forced to have a paper route to buy their hockey pads. When you’re ten years old and it’s 20 below zero, and you get on your bike and you deliver 20 papers, and if you get a 25-cent tip you’re fucking clicking your heels together — I didn’t want that for my kids. I didn’t want to be poor.”
That urge, combined with a propensity for math, helped him dream of a future beyond the town’s borders. “If you didn’t have a plan, you just prayed that you become a cop or firefighter,” McLellan says. “I thought I was going to play Division I hockey.”
Instead, he landed at Stonehill College, a small liberal arts school outside of Boston. After graduation, he moved north to become a “spreadsheet monkey” in the arcane fund accounting industry. “Not exactly what I was looking for,” he says. “I loved everything about Stonehill, but it’s not like you had Arthur Andersen there recruiting kids.” His starting salary was $21,500 — “all the money in the world to me. Then I got an apartment with two of my buddies in Boston and realized that $21,500 doesn’t stretch far.” It was 1994.
Night school followed, a master’s of science in finance at Boston College. “I took two classes at a time, at night. Worked all day, then drove down there and took classes from 7:00 to 9:00.” After graduation he proposed to his now-wife (“You find someone good, you lock it in before they leave”) and took a job at State Street for $35,000 a year. “That’s going from Natural Lite to Bud Light, right?”
The role: transition analyst. “I had no idea what a transition analyst is, but I know it’s better than what I’m doing now,” he says of the job. “I thought, at that point in time, it’s the greatest thing that’s ever happened in my life.”
It was at State Street that McLellan met the man who would come to dominate his professional career. Transitions, at that time, were led by Nick Bonn. “I was probably 25, 26 years old,” McLellan remembers. “It makes me sick to my stomach today, but I was loyal — loyal to a fault — to Nick Bonn.”
Bonn encouraged him, based on McLellan’s data skills. “He was saying, ‘We’re going to move you up the food chain. We don’t have people like you.’” As McLellan rose, he came to intimately understand what he now calls the “standard operating procedure” of the transition management group — a procedure that, with a tweak and a lie, would put him in jail.
“Let’s say a client wants to move $5 billion from the Russell 3000” — assets based in U.S. dollars — “into something valued in a foreign currency,” McLellan says. “You’ve got to sell $5 billion in U.S. dollars and move it into individual currencies. A ton of pounds, a ton of euros, yen, and so on.”
By the late 2000s, for most pension clients based in the U.S. — and thus subject to a U.S. law regarding financial dealings, known as ERISA — State Street would act as an “agent”; they had to have the client’s interests at heart.
“If you’re an ERISA client, we’re going to route your trade through UBS or Deutsche Bank or others,” McLellan says. “If you’re non-ERISA” — meaning the client is not subject to U.S. law — “we’re literally going to run you over and take as much money as we possibly can from you.” They would do this, he explains, by routing the foreign exchange trades through State Street’s own trading desk, where, like an iffy real estate agent, they would act not as an agent but as a risk-free middleman.
This standard operating procedure was sanctioned at the highest reaches of the bank, McLellan claims. “We would use terms like ‘We need to extract more value from order flow.’” David Puth — then head of State Street Global Markets, the research and trading division of the bank — “pushed us to internalize as much of our client’s order flow as we possibly could,” lauding the transition management unit’s “multiplier factor of the revenue.” Internal emails between McLellan and Bonn in 2010 show that both parties understood that millions in revenue were coming from the unit using the firm’s FX arm. “This model was in place for ten years,” McLellan now says, calling it “crack cocaine for the bottom line.” (State Street and Puth declined to comment.)
By 2009, McLellan was 37 and making good money. “Not Wall Street money, but for Boston, for a kid whose dad was making $27,000 when he topped out, I’m making good money. I viewed myself as someone that was really successful at what he was doing — but hated what he was doing.”
Despite that seeming self-awareness, McLellan then made what he now considers to be the most significant mistake of his career.
After Bonn was moved to another unit of the bank, a senior executive suggested that McLellan should ask for the role of global head of the transition management unit. He initially demurred, citing the demands of family.
“She basically called me a pussy,” McLellan says. “She’s like, ‘If you don’t do this, someone else is going to get the job and may push you out.’ That raised so many alarms in my head, because I don’t want to be my dad. I don’t want to be fired. I don’t want to be saying, ‘Guys, you can’t join that team, it’s too expensive.’ So I went for the job, and got it.”
His father would die five weeks before McLellan was arrested for what came next.
“He was a good man, but it would have killed him. It would have killed him.”
The standard operating procedure became non-standard in 2009, according to McLellan. That year it was determined that the model long applied to foreign exchange trading would now also be used for bonds. Who exactly decided on — and approved — that change is still in dispute, McLellan believes.
The first client impacted was not Royal Mail, but a massive Middle Eastern sovereign wealth fund, the Kuwait Investment Authority. To win a piece of transition business from the KIA, State Street “bid zero” — meaning they would take no fee. “Who works for free?” McLellan asks. “If you’re a $700 billion fund, you think people are working for free for you? It’s mind-numbingly dumb. Nothing’s for free.”
The Kuwaiti fund, McLellan argues, must have understood that State Street was going to make money in other ways: namely, when it came to fixed-income transitions, by acting as a riskless principal. “That’s what we did for FX. For fixed-income we did the same thing.”
It was, he says, just how things were done in Europe. “I was actually in London” during the first Kuwaiti trade, he says. “Pennings and Boomgaardt came to me and said, ‘This is how it works here. We don’t have ERISA here.’” He also spoke to two new employees, including a man named Raymond Pestana, who had joined from competitive firms; they confirmed that “that was how it was done in London. It was the wild Wild West.”
State Street began applying the same business model to other transitions, including Royal Mail’s.
McLellan knows that Pennings lied to Ian McKnight. Yet he insists that he did not instruct Pennings to do so, and was not aware that Pennings had lied until years later. “I told him that he couldn’t disclose himself as a fiduciary — as an agent — and then take non-disclosed markups,” he says.
McLellan can only speculate on how exactly Pennings got caught. “Pestana was the source,” he guesses. Now with financial giant BlackRock, Pestana had been an analyst for Pennings before departing for another transition manager, Russell Investments. “What’s the first thing you do when you get a new employee from a competitor? You sit them down in a room and say, ‘Tell me everything you know.’” McLellan now believes that Russell Investments told McKnight that, despite Pennings’ assurances, State Street had made more than its stated fee. (Pestana declined to comment for this story.)
But what McLellan now admits — for the first time — is that he lied during the subsequent cover-up.
After an independent investigation by a British analytics firm, the transition group agreed to rebate the portion of the Royal Mail trade that involved U.S. bonds. In doing so, McLellan claimed that the charges were “inadvertent.” They were not.
“‘Inadvertent commissions’ is not a true statement,” he says. “Basically, what I was trying to do was sweep this under the rug. I protected Pennings, and I never should have protected that fucking guy. And the reason why I protected him is I didn’t want him to get fired.”
The rebate was clearly a mistake, McLellan now believes. Though an internal email on September 27, 2011, shows Nick Bonn trying to calm his protégé — “Btw . . . how is it going? Puth and I had a debate and I think he agreed that this is overblown” — things were quickly spiraling beyond McLellan’s control.
“I think we were sitting in [Bonn’s] office and I was going over it with him,” McLellan explains. “And he just says, ‘You never should have done [the rebate].’ He said it was an acknowledgment of guilt.” (Bonn says he has no recollection of the conversation.)
“The toothpaste is out of the tube,” McLellan responded.
Ross McLellan would normally have taken the Hingham-Boston ferry to work on October 4, 2011. However, he assumed he was going to be fired at noon, and not wanting to wait for a scheduled return boat, he drove instead.
The night before, McLellan had been asked to meet at 9:00 a.m. with William Paine of law firm WilmerHale, which had been investigating other issues related to State Street’s foreign exchange trading practices. McLellan — who had been dealing with the Royal Mail fallout for months, and had already seen Pennings suspended — knew that at State Street, whenever you were about to get fired you got interviewed in the morning.
Three people were present at the meeting: McLellan, Paine, and a paralegal taking notes.
“Did you do transition management trades with FX?” Paine asked, according to McLellan’s recollection.
“Often,” replied McLellan.
“Did you get good execution?” Paine continued.
“No,” McLellan said. “They ripped our clients’ throats out.”
Paine continued with a line of questioning regarding FX trading. Then McLellan put forth his belief that, despite promises to the contrary, inappropriate markups were still occurring in the FX unit. Paine froze.
“Stop talking. Stop writing. This meeting is over. Leave.” (Paine did not return a call requesting comment.)
McLellan went back to his office to clear out his possessions in preparation for the inevitable. At 1:56 p.m., McLellan, who regularly texted Bonn, asked him: “Where r we?”
Confirmation came 49 minutes later. Bonn responded: “I can’t bear to face you.”
Following a session at a bar across the street where he “ripped three or four drinks” with two colleagues — and then, astoundingly, spoke on a prearranged panel for junior State Street employees looking for career guidance — McLellan got a call from David Puth, his direct boss.
“Meet me in the Eaton Valley room,” Puth said. McLellan grabbed his bag and headed to the conference room. Upon entering, he slid his company ID and his BlackBerry across the table. “We’re going to cut the rope right here,” Puth told him. “Good luck.”
McLellan was a free man, for a while. He settled into a low-key routine in Hingham, waiting out a noncompete and setting up Harbor Analytics, a business that would rely on his experience with trading data. He held no ill will toward Bonn, and the two stayed in frequent communication.
Less than two years later, on April 12, 2013, McLellan was sitting at a bar in Hingham with a friend who needed a space to dock his new boat. McLellan texted Bonn — who owns a local marina — inquiring about a boat slip for the friend.
“At Sand Trap in Weymouth. Come by for beer,” Bonn responded.
“Sand Trap? You homeless?” McLellan replied. “At Liberty Grill. Man’s bar.”
“Pussy,” wrote Bonn, who had moved on to another establishment. “At Stars. Come over.”
There, Bonn shared a disturbing development: Pennings and Boomgaardt had been arrested in London. A cold sweat erupted on McLellan’s back.
After that evening, Bonn and McLellan would have two more brief, superficial text exchanges. Almost exactly three years after that night, McLellan would be arrested in his office parking lot and, eventually, sent to trial. Pennings, Boomgaardt, and State Street would produce convincing evidence against him. But perhaps most infuriating for McLellan would be that Bonn, the mentor who had shepherded him from junior employee to one of the youngest executive vice presidents in State Street history, would abandon him entirely.
Ed Pennings was the first to turn.
On June 28, 2017, he pleaded guilty to “conspiring to defraud at least six of the bank’s clients through secret commissions applied to billions of dollars of securities trades,” according to the U.S. Attorney’s Office for the District of Massachusetts. Soon Pennings would be a star witness at the trial of Ross McLellan. McLellan was not surprised. He was, and remains, incensed.
“Never once did I tell Pennings to tell a client he was acting as an agent when he actually took an underlying spread,” he says. But he’s even angrier at Nick Bonn. “There were two moments” that made McLellan realize that his mentor had, in his eyes, turned on him. The first was when McLellan, after their communication had gone cold, heard through a friend that Bonn was instructing his team at State Street to try to run McLellan’s Harbor Analytics out of business. “That was the Judas moment,” he says. “Early on multiple people said, ‘Look, I know he likes you, but he’s eventually going to fuck you.’ Plain and simple. It’s one of those things called ‘learning lessons in life.’ You prefer to learn them when you’re 15 or 16, but I learned mine when I was 39, 40.”
The second was when McLellan was sued by the Securities and Exchange Commission. “When you get sued civilly in the United States, you get to depose witnesses,” McLellan explains. Bonn was deposed by Martin Weinberg, McLellan’s attorney, who McLellan had found by googling “best Boston white-collar criminal lawyer.”
“Weinberg encouraged me to come, and I couldn’t fucking believe what [Bonn] was saying,” McLellan recalls. “I walked out in the middle of it, which my lawyer told me was very unprofessional, but I couldn’t listen to what he was saying.”
Bonn sees it differently. Now retired from State Street and living in Hingham, he is an affable, and unflappable, interlocutor. “I have no memory of that,” he answers softly when asked about McLellan’s allegation that Bonn tried to destroy Harbor Analytics. “His stuff was good; we worked with them, and I don’t remember anything like that.” When asked about the deposition, Bonn says simply, “Well, I didn’t lie.”
He claims that, at the time, he did not have a full understanding of what McLellan had done. “I certainly remember Ross coming to see me and telling me he was in trouble — he characterized it as very, very serious,” he says. “But I never really understood the nature of what was going on until they fired him and I demanded an explanation.” The whole episode, he adds, “is a tragic thing.” Bonn did not testify at the trial and hasn’t spoken to McLellan in years.
But one apparently minor element of his trial has allowed McLellan a sliver of hope that, one day, this will all go away.
“At trial, State Street was told to produce an email,” he says. “I knew it existed because I had it at one point.” (McLellan claims he took a copy when he left the bank but destroyed it per their separation agreement.) The email, he claims, discusses Melissa McKay — a senior lawyer at the bank — approving the use of internal trading groups when working with the Kuwait Investment Authority because it was not subject to ERISA laws. This email, McLellan argues, shows “the legal department’s complicity with the KIA transition and other non-disclosed markups in London-based transitions” — in effect, institutional approval of the model employed by Pennings, Boomgaardt, and McLellan.
State Street does not deny the email’s existence, but did not turn it over at trial. In a final attempt to get the email, on June 15 of this year McLellan wrote a letter to Dame Amelia Fawcett, the lead independent director at State Street, asking for assistance. “I’m hoping every day that I wake up and Dame Amelia says, ‘Here’s the email that you need.’”
She has not responded.
“Would this be enough to vacate a conviction?” McLellan asks. “I have no idea. But it would give me some vindication that a Harvard-educated lawyer opined that for a non-ERISA client, you could act as a riskless principal despite seeing an agreement that said ‘zero commission.’ In the U.S. you need mens rea — criminal intent. How do you have criminal intent when you shared [the model] with a Harvard lawyer and she said ‘Kumbaya’?”
McLellan is blunt about what happened at trial in the absence of the email. “Explaining ‘riskless principal’ to the average person is not easy, right? Without McKay’s email it was going to be really difficult.”
He adds, “Not only did we not win, we got killed. It wasn’t even close. If I was on the jury, I’d convict me.”
And then McLellan said one more thing: “But if you hadn’t written that October 6 article, I’m not sure if this ever comes to fruition.”
On October 5, 2011, a source tipped me off that a man named Ross McLellan had been fired from a unit called transition management at State Street. I was two years into my career, and far out of my depth. I checked it out.
State Street, at first, was helpful, quickly confirming the facts for an initial news story on the employee’s departure. But as I dug deeper into the transition management business, the bank turned adversarial, as did McLellan. We had been speaking in secret after he learned I was investigating.
Text messages between Bonn and McLellan show the growing anxiety of both men. On September 27, 2012, McLellan texted Bonn, who still worked at the bank, trying to discern my source: “How did he know to look there? And why is he asking me about ETF trades and four other clients you have not rebated?”
“No idea on 4 clients,” Bonn responded. “Btw . . . he is no friend of mine.”
“He’s right on all 4,” McLellan texted back, suspecting the source lay within the bank itself. “State Street can resist blaming me for everything. Remember I know the truth. Hope he doesn’t find out about the 100 million in FX State Street made for EMEA and APAC transitions.”
McLellan and Bond never discovered the source. Yet to both men it was becoming obvious that the problem ran deeper than just a single client being overcharged.
Eight years later, in our final conversation before he reported to jail, I had a question for McLellan: Was he angry at me?
He was strikingly sanguine for a man, heavier and poorer than he once was, about to leave his wife and four young children to report to federal prison during a global pandemic that has ravaged the incarcerated.
“You had a job,” he says. “You had a scoop, and you did it very well. In the same respect, I can’t be mad at the prosecutor. He’s extremely intelligent, extremely aggressive — but at the end of the day, that’s his job. And you: At the end of the day, you had a job to do and you did it right.”
McLellan continues: “I could be wrong, but [those articles] pissed off NTMA”— the National Treasury Management Agency of Ireland, one of the clients that was revealed to have been overcharged — “and Royal Mail. People were pissed. Apparently, NTMA went bananas.” With such prominent victims so publicly named, he believes, the British financial regulator had no choice but to investigate, which, in turn, forced U.S. authorities to do the same.
Besides Pennings, Bonn, and a few others, McLellan doesn’t hold many grudges. “I got great representation,” he says of his lawyer. “I think he’s a phenomenal lawyer. I think he’s a phenomenal person, to be quite honest with you.” But even that couldn’t help him overcome the machinery of the federal government at a time when few individuals had paid for the sins of the global financial crisis, he notes.
“If I knew the lottery numbers today, of course I would have played them yesterday,” he says when asked about his 18-month sentence. “Hindsight is 20/20. I would encourage others in a similar situation to take a deal. The odds are stacked against you, and fighting the government is not a fair fight.”
He muses, “You know, two of my kids play hockey goalie. If a kid comes in and scores a goal on them, am I mad? No. It’s their job to score. In life, you’ve just got to not let that . . .”
He trails off. “Just don’t get to the point where this can happen, right?”
The conversation was over. “I’ll see you on the other side, pal,” he said.