State Street Investigated Again in FX Probe

(April 29, 2011) — State Street Corp., the third-largest custody bank, is currently being investigated by Massachusetts’ chief securities regulator over its handling of foreign-exchange transactions.

The inquiry — conducted by Secretary of the Commonwealth William F. Galvin — has been investigating the case for roughly two months, spokesman Brian McNiff told aiCIO, noting that the investigation was likely spurred by a series of complaints. “If you look around the country, a growing number of cases have been brought involving the same subject of currency exchange transactions and whether they were done in the best interest of the client.”

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 said 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.”

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.

State Street’s competitor, 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. Last month, in an effort to recover allegedly unlawfully obtained proceeds from foreign-exchange transactions, the Southeastern Pennsylvania Transit Authority (SEPTA) sued BNY Mellon. In a statement, the New York-based bank said: “The allegations are without merit. We provide a broad range of valuable services including foreign exchange to large, sophisticated money managers representing pension funds and other institutional clients. The money managers transact with us at competitive FX prices and we provide reliable, low-risk service and execution. We will defend ourselves vigorously.”