Exclusive: Two more U.S.states probe State Street forex pacts

SAN FRANCISCO (Reuters) - Attorneys general in Massachusetts and Illinois have investigated State Street Corp's (STT.N) 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 (BK.N) 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.

The banks, whose currency operations are a lucrative business, reject accusations of wrongdoing.

The offices of the Massachusetts and Illinois attorney generals separately received contracts and other documents between State Street and the Washington State Investment Board last November, according to public records requests obtained by Reuters.

Washington is the only state known to have settled a recent dispute with a custodial bank over foreign exchange practices, obtaining $11.7 million from State Street in October. Massachusetts also sought a copy of that agreement.

Representatives for the Illinois and Massachusetts attorneys general did not respond to requests for comment.

"As we have previously disclosed, we are responding to inquiries from some AG's which is not unusual given the fact that we service many municipalities through our large U.S. public fund business," State Street spokeswoman Carolyn Cichon said in an email.

The office of California's attorney general, which already has sued State Street Bank, sought similar materials from Washington State, records show. The California case, brought on behalf of both the California Public Employees' Retirement Systems, or CalPERS, and a separate teachers' fund, is still ongoing.

It is unclear whether any private whistle-blower cases have been filed in Illinois and Massachusetts, as they often remain secret until state officials decide whether to pursue a case.

In New York state, two Delaware shell companies have sued State Street and BNY Mellon, according to docket records. Those lawsuits remain sealed. The New York attorney general has not made any announcements about whether he would take up the cases.

The Illinois State Board of Investment recently began requiring its fund managers to time-stamp all foreign exchange trades, said the investment board's executive director, William Atwood. That gives the board a way to compare a trade price to the overall market and gauge how good a deal it got.

"When the fur started to fly at CalPERS, we examined our FX trading practices," Atwood said.

The Illinois board, which manages $10.7 billion in assets, hired an outside firm to monitor its forex trading, Atwood said, and it has not made any legal demands on its fund managers or State Street.

The Massachusetts Pension Reserves Investment Management Board, which manages $41.3 billion in assets, examined its foreign exchange practices after the California revelations and found that it had received favorable treatment on the "vast majority" of its trades, spokesman Barry Nolan said.

Boston-based State Street handles some of Massachusetts' foreign equities, and the pension board's executive director has not made any changes or pursued any legal demands, Nolan said.

Other public pension funds have pursued legal claims against State Street, besides those for state workers. For instance, the Arkansas Teacher Retirement System filed a proposed class-action lawsuit earlier this month.

(Reporting by Dan Levine, editing by Gerald E. McCormick)