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California Sues State Street over FX Markups

The state of California is suing State Street Corp. for $200 million, alleging it “ripped off” two pension funds by overcharging on foreign exchange trades since 2001.

Attorney General Edmund Brown Jr last Tuesday (20 October) filed suit against State Street for committing “unconscionable fraud” against California’s two largest funds, California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS).

The state has taken over a previously filed whistleblower complaint, which charges that State Street made some $56 million in “secret and substantial markups” to the price of interbank foreign currency trades that it made for the two funds.

Despite being contractually obligated to charge the interbank rate at the precise time of the trade, Brown alleges that State Street consistently charged at or near the highest rate of the day.

The attorney general adds that State Street omitted time stamps on trade confirmations to prevent the pensions from checking whether they got correct rates.

“Over a period of eight years, State Street bankers committed unconscionable fraud by misappropriating millions of dollars that rightfully belonged to California’s public pension funds,” Brown says. “This is just the latest example of how clever financial traders violate laws and rip off the public trust.”

The suit also cites internal State Street emails, which are said to refer to the “touchy” FX question and allegedly state that senior management of the funds would be “shocked” if a State Street employee revealed how much the bank made out of FX.

State Street has been master custodian for the $201.5 billion CalPERS, Sacramento, since 1992 and for the $126.9 billion CalSTRS, West Sacramento, since 1986.

Brown’s office estimates that the pension funds were overcharged by more than $56.6 million over eight years. The attorney general is seeking more than $200 million in reimbursement of the allegedly illegal overcharges and penalties: the $56 million he claims the state lost plus triple in damages.

State Street last week rejected Brown’s assertions. “We categorically deny any allegations of wrongdoing and will defend ourselves against any litigation,” a bank spokesperson said in an e-mail statement.

Senior salespeople in the FX market spoken to by Squawkbox were reluctant to give an opinion on what is clearly a very sensitive subject, although one senior banker said that the funds should take a share of the blame.

“This is why the banks have been trying to get their customers on the platforms for so many years,” the salesperson argues. “If these trades were executed electronically there would be a timestamp and a full audit trail. If CalPERS didn’t trade electronically then it may be hard to prove anything, especially going back eight years but then you have to ask the question, why did they stay on the phone?”

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