By Ross Kerber and Svea Herbst-Bayliss
BOSTON (Reuters) - Massachusetts' top securities regulator on Wednesday alleged a unit of custody bank State Street Corp (STT.N) routinely overbilled customers for items such as messaging services, even as an executive worried one client might "discover that we are taking them to the cleaners."
In an administrative complaint, Secretary of the Commonwealth William Galvin said State Street Global Markets LLC has engaged in a pattern of overcharging, noting the company often labeled charges for secure electronic messages - known as SWIFT messages - as "out-of-pocket" expenses that contained concealed markups of up to 1,900 percent.
In a statement e-mailed by spokeswoman Anne McNally, State Street said in December it discovered invoice errors on some expenses and notified authorities including Galvin's office. It will repay clients and reform its billing practices as needed, the company said.
The bank also has been in talks with clients over the matter, it said, as well as with government authorities, with whom it pledged to cooperate. "We deeply regret this error," the statement said, adding the bank cannot comment further because an internal review is still ongoing.
The complaint is the latest regulatory action to review claims of overcharging at Boston-based State Street, one of the world's largest custody banks that handles trades for big investors. Clients include pension funds, mutual funds, hedge funds and institutions.
In a 2014 settlement with the United Kingdom Financial Conduct Authority, State Street agreed to pay of a fine 22.9 million pounds ($32.91 million) for charging clients "substantial mark-ups" they had not agreed to pay.
Also, in what Galvin's complaint calls "a related matter," U.S. prosecutors earlier this month alleged two former State Street executives conspired to add secret commissions to fixed-income and equity trades.
Galvin's complaint claims State Street routinely concealed markups to clients and earned hundreds of millions of extra dollars, in what it describes as "a dishonest and pervasive culture of overbilling."
The complaint quotes several internal emails suggesting its own employees were concerned about how it billed expenses. One wrote that a charge of $5 per message was "an exorbitant markup that will certainly piss off clients when they figure this out."
Another wrote of a concern that a large client might discover that "we are taking them to the cleaners on SWIFT charges."
Clients described in the complaint as "an international financial organization" and "a boutique investment manager" did raise concerns about their bills but got little relief at least initially, the complaint states.
Galvin's complaint seeks a censure, an administrative fine and other actions including client reimbursements.
(Reporting by Svea Herbst-Bayliss and Ross Kerber in Boston, editing by G Crosse and Alan Crosby)