February 3, 2011 / 11:49 PM / 9 years ago

UPDATE 1-U.S. states ramp up foreign currency trade probes

* Lawsuits accuse custody banks of overcharging funds

* Florida, Virginia AG intervene in whistle-blower cases

* Source says more court complaints may be under seal (Adds comments, Washington state settlement with State Street; updates stock prices)

By Martha Graybow and Tom Hals

NEW YORK/WILMINGTON, Del., Feb 3 (Reuters) - U.S. states are stepping up probes into whether banks overcharged public pension funds millions of dollars in converting currencies for securities trades, a lucrative area of banking.

Officials in Florida, Virginia and California are examining foreign-exchange fees paid by state retirement systems and they are getting help from would-be whistle-blowers who have filed private lawsuits against Bank of New York Mellon Corp (BK.N) and State Street Corp (STT.N).

Florida Attorney General Pam Bondi filed on Thursday a state court notice of intervention in a case involving Bank of New York Mellon, according to a court filing.

“The AG’s office is investigating this practice,” spokeswoman Jennifer Krell Davis said in an email.

Foreign exchange traditionally has been a rich source of revenue for U.S. banks, particularly custodial banks, which not only profit from buying international stocks and bonds for pension funds and other investors, but also on trading dollars into other currencies. Foreign exchange overall is a huge business, with average daily volume of $4 trillion.

States are examining whether banks charged their pension plans false exchange rates for foreign currency trades rather than the actual rates. Washington state announced in October it had recovered $11.7 million from State Street after a dispute over foreign exchange trade costs from 1997 to 2007.

The Florida lawsuit and others are tied to financial investigator Harry Markopolos, best known for trying to warn regulators that Bernard Madoff was running a fraud, said Patrick Burns, spokesman for Taxpayers Against Fraud, a Washington group that has worked with Markopolos.

News of the widening scrutiny helped push down shares of both Bank of New York Mellon and rival State Street. The two large custody banks reject accusations of wrongdoing.

There may be similar cases that have not yet been made public, said a source familiar with the matter who requested anonymity because litigation is pending. There is interest in bringing other cases, although pension funds are cautious about upsetting relations with banks, this person said.

The same whistle-blower that sued State Street in a California lawsuit, FX Insider Trading, also sued the company in a New York state court, according to legal database Westlaw, part of Thomson Reuters. The New York case was filed in April 2008, about a week after FX launched the California case.

While the state of California decided to join the State Street case, the New York attorney general’s office does not appear to have done the same. An order to extend time to intervene was entered in the New York case last fall, Westlaw shows, and the matter is still under seal.

A spokesman for the New York Attorney General declined to comment.


Investors have long complained about dealers hoarding pricing information in foreign exchange and other over-the-counter markets. Part of last year’s Dodd-Frank financial reform law is geared at improving transparency in over-the-counter derivatives.

“In the end in this business, given the opportunity, those that hold certain information will take advantage as much as they can within the legal limits,” said Sang Lee, who specializes in foreign exchange market research at advisory firm Aite Group in Boston.

“Overall, I think the potential is there for this investigation to become really widespread.”

Getting government officials to step in to lead lawsuits initiated by would-be whistle-blowers is key to such cases moving forward. Whistle-blowers can share in any potential settlement or other payments that companies may make.

The Florida lawsuit and a similar case in Virginia were brought by an entity called FX Analytics, which has ties to Markopolos, the Boston-based investigator whose warnings to regulators on Madoff went unheeded for years.

The Virginia case, which recently was unsealed, seeks $150 million in damages from Bank of New York Mellon. Virginia Attorney General Kenneth Cuccinelli has intervened in the case, his spokesman said on Thursday.

Bank of New York Mellon said the allegations against it were without merit. It said money managers at pension funds and other institutional clients “transact with us at competitive foreign exchange prices and we provide reliable, low-risk service and execution.”

California announced a case against State Street in 2009 that sought $200 million for committing an “unconscionable fraud” against the state’s biggest pension funds, including the California Public Employees’ Retirement Systems, or Calpers.

State Street spokeswoman Carolyn Cichon said the bank’s “FX services are consistent with our contractual obligations with the California state entities and we are defending ourselves against the charges made in the complaint.”

One plaintiffs’ attorney, Reed Kathrein of law firm Hagens Berman LLP, said he examined State Street contracts with a couple of pension fund clients, but those contracts did not contain the same language as the CalPERS deal with State Street, which specified the trades be priced at the time of the trade.

“We were not able to find anything that led us to the same place,” he said.

Bank of New York Mellon shares fell 1.2 percent to $31.46 on Thursday, while State Street declined 1.5 percent at $46.54, both on the New York Stock Exchange. (Additional reporting by Michael Connor in Miami, Dan Levine and Jim Christie in San Francisco, Svea Herbst-Bayliss and Ross Kerber in Boston and Gertrude Chavez, Dan Wilchins and Chris Sanders in New York; editing by Gerald E. McCormick and Andre Grenon)

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