BNY Mellon Allegedly Cheated MassPRIM Out of $20 Million in Foreign Exchange Trading

(June 13, 2011) — Bank of New York Mellon allegedly overcharged Massachusetts Pension Reserves Investment Management (MassPRIM) more than $20 million on foreign exchange (FX) trading, State Treasurer Steven Grossman and MassPRIM Executive Director Michael Trotsky claimed in a June 13 press conference.

Bank of New York Mellon serves as MassPRIM’s custody bank and allegedly defrauded the pension fund over a period of four years.

“These overcharges are unacceptable and we will take every step available to recover lost funds and prevent this from happening in the future,” Grossman said in a statement.

The Securities and Exchange Commission (SEC), along with several state attorney generals and other regulators, began investigations this spring into both BNY Mellon and State Street Corporation. Custody banks have been accused of preying on public pension funds that lack the resources to maintain proper oversight on FX trades, aiCIO has reported.

“Pension funds, which pay millions and millions of dollars in custodial fees, have been lazy. They decide to outsource to custodial banks, and they don’t understand FX issues. Pension funds’ chief financial officers or treasurers should look at the time and price of trades, but they don’t,” Chris Havener, Founder & Managing Director of Royal Oak Capital Management, told aiCIO.

The Massachusetts pension fund hired a consulting firm earlier this year to review MassPRIM’s currency transactions in the wake of the allegations that custody banks had cheated public pension funds on their foreign exchange trades.

The announcement comes on the heels of MassPRIM’s implementation of a plan to shift about $500 million of its $3.8 billion hedge fund-of-funds allocation to a direct hedge fund pilot program.