State Street charged with fraud against pension funds

Date: Friday, October 23, 2009
Author: ICFA

State Street has been charged with “raiding the custodial accounts” of California’s largest pension funds by fraudulently pricing foreign currency trades.

California’s attorney general Edmund Brown filed a lawsuit against the bank yesterday (Tuesday October 20) claiming State Street had overcharged the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) by $56 million.

Brown is seeking to recover over $200 million from State Street in damages and penalties.

The complaint alleges that State Street “marked-up” the price of foreign currency trades using rates “far in excess” of the interbank rates at the times of the trades. When the bank converted foreign currency back into US dollars it marked prices down, according to the complaint.

The suit claims State Street concealed its “fraudulent pricing practices by entering false exchange rates into its electronic trading databases”, including those from which the pension funds obtained reports about their account activity.

According to the complaint, the contracts agreed between the funds and State Street in 2001, when both re-selected the bank as custodian, explicitly stated that all foreign currency trades should be priced based on interbank rates.

The claim was first filed in April 2008 by a whistleblowing group, Associates Against FX Insider Trading. Brown then conducted an investigation which concluded State Street “was indeed overcharging the two funds”, according to a statement released yesterday.

State Street said: “We categorically deny any allegations of wrongdoing and will defend ourselves against any litigation.”