February 27, 2012 / 2:35 PM / 7 years ago

UPDATE 3-State Street says N.Y. authorities probing forex

* At issue: non-negotiated trades

* Trading practice a major source of State St revenue

* Shares up less than 1 percent

By Tim McLaughlin

Feb 27 (Reuters) - U.S. and New York state prosecutors are investigating State Street Corp’s foreign exchange trades, the bank said on Monday, potentially putting more pressure on a major source of revenue for the company.

State Street shares were up slightly on Monday, but they are down 10 percent over the past year, as State Street and rival Bank of New York Mellon Corp have been hit by lawsuits accusing them of improperly charging pension funds for foreign exchange.

The New York state attorney general and the U.S. attorney for the Southern District of New York have made inquiries into what State Street described as “our indirect foreign exchange execution methods.”

Those same New York authorities last year filed civil lawsuits against BNY Mellon, State Street’s top rival. In a lawsuit in October, the New York attorney general alleged BNY Mellon earned $2 billion over the decade from the trading. Earlier this month, the U.S. attorney in Manhattan filed an amended complaint against BNY Mellon that said the bank “repeatedly lied” about its forex transactions.

The bank has denied any wrongdoing.

Boston-based State Street, which is the largest provider of mutual fund custody and accounting services in the United States, made the disclosure about the New York investigation in its annual report filing with the U.S. Securities and Exchange Commission.

At issue are the prices custody banks have charged on so-called non-negotiated trades, typically on forex transactions that are less than $1 million. Pension funds and U.S. authorities have accused the custody banks of misrepresenting the pricing on the trades. The banks have denied any wrongdoing, but they also have changed their practices.

State Street’s revenue from non-negotiated trades in 2011 dropped 1 percent year-over-year to about $331 million. That compares with total forex revenue of $683 million, which was an increase of 14 percent over the year before. Electronic forex trading is not included in those figures.

In its annual report, State Street said heightened regulatory and media scrutiny of these forex trades could result in pressure on pricing and reduce client volume.

“Some custody clients or their investment managers have elected to change the manner in which they execute foreign exchange with us or have decided not to use our foreign exchange execution methods,” State Street said in the filing.

In 2009, California’s attorney general accused State Street of making false claims on its forex trading. The attorney general in that case has asserted actual damages of $56 million for the period from 2001 to 2009. It also is seeking additional penalties and damages.

Meanwhile, Bernstein Research analyst Brad Hintz said State Street has struggled to pass along price increases to clients throughout its business segments.

“The firm continues to face questions from investors who are at a loss to square the seeming oligopolistic structure of the industry with a lack of individual firm control over pricing,” Hintz said in a research note. “State Street continues to express a cautious view about the ability of industry participants to exercise pricing power.”

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