State Street Encounters Heightened Scrutiny Over FX Transactions With SEC Probe

The Securities and Exchange Commission has joined state and federal investigators looking into whether State Street Corp. overcharged investment clients millions of dollars for foreign exchange transactions.

(May 12, 2011) — The Securities and Exchange Commission (SEC) is investigating State Street over its pricing of some foreign-exchange services, which has been a large source of revenue and profits at banks.

In its latest quarterly filing, Boston-based State Street, the third-largest custody bank, disclosed the SEC investigation, noting that “attorneys general from a number of [states] as well as US attorney’s offices, the SEC and other regulators have made inquiries or issued subpoenas.”

State Street is also currently being investigated by Massachusetts’ chief securities regulator over its handling of foreign-exchange transactions. Regarding the pricing of its foreign-exchange transactions, State Street has already been sued by California and the Arkansas Teacher Retirement System for alleged fraud. Filed in early February in the US district court in Boston, the suit alleges that State Street, the custody bank for more than 40% of US public pension funds, violated state law by overcharging customers for currency trades. According to the suit, the bank generated as much as $500 million in profits annually — a rate of profit that accounts for about 50% of State Street’s foreign exchange profits over the last decade. In response, State Street says the Boston-based company is “firmly committed to providing its clients with quality service and transparency in meeting their FX needs. We will vigorously defend the allegations made in the complaint and we stand by our business practices,” State Street says.

In 2009, the nation’s two largest public pension systems — the $226.6 billion California Public Employees’ Retirement System (CalPERS) and the $146.4 billion California State Teachers’ Retirement System (CalSTRS) — launched a case, which is ongoing, against State Street over it’s foreign-exchange fees.

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State Street’s rival, Bank of New York Mellon, is the subject of similar claims from Virginia, Florida, and a public pension fund in Pennsylvania, accused of manipulating FX transactions and overcharging pension systems for transactions in order to maximize their profits at the expense of clients.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(May 12, 2011) — Industry sources say that the conviction of hedge fund manager Raj Rajaratnam serves as a warning to Wall Street on the severe consequences of engaging in insider-trading.

Yesterday, Raj Rajaratnam, the hedge-fund tycoon and co-founder of Galleon Group LLC at the heart of a US insider-trading investigation, was found guilty of all counts against him.

If Bernie Madoff’s downfall wasn’t enough to frighten the industry over the severe penalties of engaging in illegal activity, the Rajaratnam conviction serves as another reminder. “The Raj Rajaratnam case is causing managers who utilize consultants to review their process and use of consultants and expert networks,” Ron Geffner, vice president of the Hedge Fund Association and a partner at law firm Sadis and Goldberg LLP, told aiCIO. Another outcome of the conviction, according to Geffner, may be a heightened awareness over the use of text and email as communication tools. Federal prosecutors spent more than a month trying to prove Rajaratnam’s guilt. In one case against him, jurors heard Rajaratnam coaching Krish Panu, a Galleon managing director, on how to create a fake email trail to make it look like stock purchases were based on legitimate research and not illegal tips, Fox Business reported.

Rajaratnam faces a prison term of up to 25 years when he is sentenced by presiding US District Judge Richard Holwell.

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“Hopefully people are more mindful of how they communicate,” said Geffner, a 20-year corporate and securities lawyer with a history of prosecuting money managers.

Ross Ellie of SEI told aiCIO: “You have to believe that now that the authorities busted Raj so convincingly, they will feel emboldened to go after a lot of others – I suspect many folks will cave and agree to lesser charges to avoid the potential for long prison sentences.”

From brokerage firms to investment advisors, there seems to be a greater focus on regulatory compliance within the asset management industry, largely because the penalty is so high, Geffner said. The severity of the damage to one’s reputation as a result of engaging in illegal activity often serves as an even greater deterrent. “Reputation that was once limited to geography is now readily apparent globally, largely due to the Internet,” according to Geffner.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742