An East London tribunal has ruled that a former State Street employee should not be compensated for unfair dismissal from the custodian bank.
Edward Pennings, formerly State Street Global Markets (SSGM) head of Global Client Solutions and head of EMEA for the banks transition management business, was dismissed from his duties as senior managing director in September 2011 when it came to light that clients such as the Royal Mail pension fund and the Kuwait Investment Authority (KIA) were overcharged on transition management deals. He sued the custodian bank for unfair dismissal in a trial that also questions the ethos around the visibility of mark-ups on these deals.
State Street as respondent asserted that this was a fair dismissal and was for gross misconduct. Pennings said that he was a scapegoat, sacrificed to save the banks reputation with a major client and to protect its image in the marketplace in which it operates.
Presiding Employment Judge Housego ruled that the claimant was unfairly dismissed by the respondent, but that the dismissal was caused entirely by the conduct of the claimant and had a fair procedure been followed the claimant would have been dismissed fairly. The claim for breach of contract was dismissed after being withdrawn by Pennings.
It emerged at the tribunal in December last year that the Royal Mail audited the transition of the bond portfolio of March 2011 and discovered that mark-ups worth about $1 million were charged on the U.S. leg. That amount was paid back to the client. Royal Mail then commissioned an independent study into the transition with the help of performance measurement firm Inalytics, and found it was overcharged for the entire transition. The amount outstanding for overcharging on the non-U.S. trades was then also refunded.
Pennings was suspended in September 2011. His suspension was extended while the bank investigated overcharging on bond transactions more broadly. At a meeting in October, he was told to resign or face a disciplinary hearing. Pennings elected to face a disciplinary hearing in early November and was subsequently dismissed.
In the judgment out today, the tribunal said it decided that the reason for the dismissal was misconduct. Our considered judgement is that the claimants actions were entirely responsible for his dismissal, which was a conduct dismissal, and that given that the conduct relates to integrity within a trading environment, where he owed a fiduciary duty to his client, which he breached, was gross misconduct.
It concluded that no compensation was appropriate. We have found fault with the process, and so this was an unfair dismissal, though no remedy is appropriate.
However, the tribunal said it considered State Streets dismissal process and found it wanting. It found that had a fair procedure been followed there would have been a fair dismissal and that the conduct of the claimant was such that whatever failings there were on the part of the part of the employer this tribunal would award him no compensation.
In his tribunal submission, Pennings aimed to show disparity of treatment with his superiors, Ross McLellan and Rick Boomgardt, who were also dismissed from State Street shortly before him.
Pennings was dismissed but was allowed to keep his stock options and other benefits, apparently amounting to several million dollars. There is a different legal structure in the US, said the judgment. Mr McLellan was asserted to be a heavy hitter in the US, and the bank says that it saw commercial advantage in secrecy over a UK deal that had gone awry, and to preclude Mr McLellan from taking its US clients was worth the cost. There is no evidence to make us doubt those assertions.
Following an employment hearing between Pennings and State Street in October 2011, Rick Lacaille, the banks Global CIO, decided that Pennings should be dismissed. The tribunal found Lacaille had no previous experience of a disciplinary hearing. There is a detailed procedure set out in the banks policy, said the judgment. It requires an investigation officer. There was none. It requires an HR person to act (in effect) as secretary to the process. It was by no means clear whose decision it was to dismiss, and the HR individual was an integral part of that decision making process. There were enquiries made after the hearing, made by the person chairing it, and not reported to Mr Pennings for comments. These are elemental errors.
Pennings appeal was heard by Anthony Carey, COO, who subsequently thought Pennings should be dismissed.
The tribunal identified several procedural errors with the dismissal process:
-Lacailles disciplinary meeting was run by the HR adviser, who did not advise so much as participate in the decision-The banks procedure was not followed, as this provides for an investigation officer with an HR person present, and that did not occur.-After holding his meeting with Pennings, Lacaille made his own investigations with David Puth, formerly head of SSGM, without telling Pennings. Puth was dismissed after Pennings.-Carey had between four and eight meetings with Freshfields, State Streets legal counsel, about the appeal. It is hard to see this as a truly independent appeal, said the judgement.-State Streets head of compliance was not spoken to at all. Since one of the allegations was misleading compliance, that was essential.
During Pennings cross-examination at the tribunal, State Streets counsel asserted that, far from seeking to preserve a business model endorsed by the bank, he had lied to clients as well as misled the banks compliance department. On a Royal Mail global corporate bond portfolio transition management transaction, according to the banks counsel, Pennings lied to the client about overcharging and undisclosed mark-ups on both the European and U.S. leg of the transition. The client was made aware of mark-ups charged on the U.S. leg and the amount overcharged on that leg only was subsequently refunded.
Part of the revenue from such deals comes through FX deals, the tribunal found. Mr Pennings asserts that this is in principle very similar to what he was dismissed for doing but, far from being a disciplinary matter, is regarded as praiseworthy. The difficulty with this assertion is that, first, the cost to the client is no larger than dealing with competitors, and, secondly, although the exact amount made by the bank is not known to the client, the client knows that a turn is being made on the money being exchanged. In addition, the terms of business with the Royal Mail pension fund had been amended shortly prior to this deal, specifically to insulate FX business (and profits on futures contracts). There was no such amendment to permit the taking of secret profits on bond deals. Nor could there be, because the safeguard of best pricing does not translate to the taking of secret profits. In this case secret profit of 1 basis point was taken on US bonds and 2 basis points on European bonds.
Mr Pennings asserts that what he did was entirely proper, whereas we have found great difficulty in distinguishing from embezzlement, the judgement read.
We may summarize that by setting out that the test is whether the employer had a genuine belief on reasonable grounds after a proper investigation in the employees misconduct, whether a fair procedure was followed throughout, and whether dismissal was within the range of responses of the reasonable employer. If the dismissal was unfair, and we find that this was procedurally unfair, we have to consider what might have happened had a fair procedure been followed. We dont find the procedure fair so the dismissal was unfair, but had a fair procedure been followed it is inevitable that the outcome would have been the same.
A statement from State Street said: We are pleased by the ruling of the employment tribunal. State Street has consistently maintained that the actions of Ed Pennings fell seriously short of the standards and conduct expected of any employee at State Street, and we have zero tolerance for this. We are committed to maintaining the highest standards of conduct. As a result of this issue we have strengthened our transition management business and enhanced our governance and controls.
Pennings legal counsel was unavailable for comment.
-Janet Du Chenne