Prosecutors Expand Investigation Into Banks on Cheating Pensions

(February 4, 2011) — Bank of New York Mellon Corp. is in the midst of a lawsuit for overcharging the Virginia state pension fund for foreign exchange transactions, as US states are becoming more aggressive in foreign currency trade probes.

The case follows a nearly identical lawsuit, which is ongoing, brought by 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) — which launched a case in 2009 against State Street over it’s foreign-exchange fees. In October, Washington state revealed it had recovered $11.7 million from State Street over foreign exchange trade costs during a 10-year period.

According to the allegations against BNY Mellon made by a whistleblower group, as reported by the WSJ, BNY Mellon currency traders created fake trades and overcharged Virginia pension funds by at least $20 million. The case draws attention to the relationship between custodians and pension funds, with states placing heightened scrutiny on the lucrative business of foreign exchange.

Both Bank of New York Mellon and State Street deny wrongdoing. In a statement, BNY Mellon 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.”

“In the end in this business, given the opportunity, those that hold certain information will take advantage as much as they can within the legal limits,” Sang Lee, who specializes in foreign exchange market research at Aite Group, told Reuters. “Overall, I think the potential is there for this investigation to become really widespread.”