State Street Forex Probe Expands

Massachusetts and Illinois sought Forex documents

SAN FRANCISCO: Attorneys general in Massachusetts and Illinois have investigated State Street Corp’s currency trading dealings with state retirement systems, public records show, a sign that foreign exchange probes have expanded to more states.

Yet unlike some other states, officials in those two states have yet to bring any public legal action against the custody bank.

State Street and Bank of New York Mellon Corp face lawsuits in California, Florida and Virginia over foreign exchange rates they charge state pension plans for buying and selling currencies. Would-be whistle-blowers brought the cases on behalf of the funds, and attorneys general in the three states have now stepped in to lead the lawsuits.

The cases are being closely watched because if the plaintiffs were successful, banks could be forced to pay millions of dollars in damages or settlements. The states claim they were overcharged for currency transactions, such as swapping dollars for euros or yen, to buy and sell international securities in their fund portfolios.

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State Street Pays $11.7 Million In Forex Settlement

Update: State Street Is Sued...

By Dan Levine and Ross Kerber

SAN FRANCISCO/BOSTON (Reuters) - The only U.S. state pension fund known to have settled with State Street Corp over recent foreign exchange trading issues received its "full demand" from the bank, records show, terms that could lay the groundwork for deals elsewhere.

The Washington State Investment Board reached an $11.7 million agreement with the custodial bank last October, without filing a lawsuit. Other states such as California, Virginia and Florida are taking legal action against custodial banks on behalf of their retirement funds.

State Street and Bank of New York Mellon face whistleblower allegations that they charged unfairly high prices for currency trading transactions, inflating their own profits. They reject accusations of wrongdoing.

The lawsuits accuse the banks of charging higher prices than the trades actually were executed at -- often the highest price of the day. The banks allegedly deceived the pension funds by giving false reports of the real price.

In the Washington dispute, state officials asserted State Street made trades "inconsistent with the contracts" it had to manage public money, according to a settlement document.

The $11.7 million obtained by the WSIB represents the "full demand" that officials representing the pension fund made to the bank, according to minutes from a WSIB subcommittee meeting last November.

On Thursday, WSIB executive director Theresa Whitmarsh confirmed that the board received 100 cents on the dollar for its forex claims. The fund also paid no attorneys fees, a state lawyer said at the November meeting.

GUIDEPOST FOR OTHER DEALS?

The pact could be a guidepost for deals State Street might be willing to cut elsewhere, said Rick Smith, managing director of Forex Advisor, a training company in Tucson, Arizona.

To put the payment in context, the WSIB manages $77 billion in assets. In Florida, plaintiffs have alleged BNY Mellon defrauded a $128 billion retirement fund of at least $30 million over a period of years."

"My suspicion is that if were willing to settle for $11.7 million, they were probably aware that could set a precedent for other states," Smith said.

State Street spokeswoman Carolyn Cichon said the bank's contractual obligations to Washington State were "significantly different" than in the states where suits are under way.

Asked if the Washington settlement details implied the company might make similar full payments to other states, Cichon said: "It wouldn't be accurate to make a correlation between this and the others."

The California lawsuit, made public in 2009, prompted Washington's investigation into its own forex arrangements, according to the Washington State Treasurer's office.

An October press release from Washington state officials says the dispute arose over the pricing of foreign exchange transactions between 1997 and 2007 when State Street served as custodian for the state's investment board. There was no admission of wrongdoing in the settlement.

"AN OLD STORY"

State Street has not made executives available for interviews on the foreign exchange issues, citing the ongoing litigation.

But Chief Executive Joseph Hooley played down the impact when asked about the legal claims during a meeting with analysts on February 10 in New York.

"With regards to foreign exchange, hot topic in the news these days, it feels to me like a little bit of an old story," Hooley said, according to a transcript of the meeting.

The $11.7 million Washington state payment is just a small fraction of State Street's total 2010 revenue of $8.95 billion. Analysts have not seemed alarmed about the issue and did not press Hooley at the analyst forum, the transcript shows.

Hooley noted the bank offers various trading deals to customers ranging from those who want to negotiate directly to those who want smaller trades bundled with other services.

The latter type, he said, "is where most of the noise that you read about is."

One plaintiff's lawyer pursuing claims against State Street was encouraged by Washington State's recovery.

"Based on a settlement of 100 cents on a dollar, this should be a wake-up call to all firms to examine the forex issue," said Eric Belfi, a partner at law firm Labaton Sucharow representing an Arkansas pension fund in a proposed class action against State Street on similar forex issues.

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Bank of New York Mellon Claims Forex Fraud Charges False

BOSTON/SAN FRANCISCO, Feb 16 (Reuters Legal) - Recently unsealed lawsuits against Bank of New York Mellon contend it overcharges customers about $500 million a year for foreign currency trades, showing the high stakes facing banks in ongoing probes.

The figure is disclosed in lawsuits filed on behalf of pension funds in Florida and Virginia. It follows claims of an annual $400 million national fraud contained in a lawsuit against State Street Corp in California.

Broadly, the suits allege the banks improperly charged unfairly high prices for forex transactions, inflating their own profits.

Both banks have denied wrongdoing and vowed to defend themselves. Said a BNY Mellon spokesman: "The unsubstantiated claim that BNY Mellon engaged in 'fake' trades at 'false' prices is categorically untrue, and we will vigorously defend against these false allegations."

At the least, the $500 million figure suggests there is more room for other lawsuits to be brought by state retirement systems or investors who believe they paid custodial banks too much for foreign exchange transactions.

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Posted on February 16, 2011 12:27 by Tom Herod
Tags: state street, blackrock, mellon
Categories: Broker News | Regulation
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State Street Forex Is Sued By The Arkansas Teacher Retirement System Over Forex Trades

Ronald Logue, CEO of State Street Global Markets

Earlier today we reported how BlackRock Inc., in its own internal investigation, suspected the Bank of New York Mellon of spread widening. Now Reuters India reports that the scrutiny of foreign currency trading in the United States is shifting to whether private investment firms, not just public pension funds, were overcharged by the banks that handle these lucrative transactions.

Today, the Arkansas Teacher Retirement System brought suit against State Street, the latest pension fund to accuse trust banks of failing to give clients the best prices on foreign exchange trades.

The suit, which was filed today in federal court in Massachusetts and which seeks class-action status, alleges that Boston-based State Street for more than a decade violated state law by overcharging many customers for currency trades.

Read the full Reuters India article...

These things usually come in threes. Wonder who's next?

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State Street Forex Probe Expands

State Street Pays $11.7 Million In Forex Settlement

GUIDEPOST FOR OTHER DEALS?

"AN OLD STORY"

Bank of New York Mellon Claims Forex Fraud Charges False

State Street Forex Is Sued By The Arkansas Teacher Retirement System Over Forex Trades