CA Charges State Street for 'Unconscionable Fraud' against Pension Funds

October 20, 2009 ( - California Attorney General Edmund G. Brown, Jr. has accused State Street Bank and Trust of overcharging the Golden State's two giant public pension funds by more than $56.6 million over eight years for executing foreign currency trades.

According to the state’s lawsuit unsealed Tuesday, victims of what Brown labeled “unconscionable fraud” of the alleged State Street scheme werethe California Public Employees’ Retirement System (CalPERS ) and California State Teachers Retirement System (CalSTRS). The two are the first- and second-largest U.S. public pension funds.

“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 charged in an announcement. “This is just the latest example of how clever financial traders violate laws and rip off the public trust.”

The lawsuit asks for relief in the amount of triple California’s damages, civil penalties of $10,000 for each false claim, and recovery of costs, attorneys’ fees and expenses. Brown’s announcement estimated the state’s eventual total claim could be more than $200 million.

“We categorically deny any allegations of wrongdoing and will defend ourselves against any litigation,” said Hannah Grove, a State Street spokeswoman, in a statement released Tuesday.

The case was originally filed under seal by whistleblowers, "Associates against FX Insider Trading," which alleged that Boston-based State Street added a secret markup to the price of interbank foreign currency trades. The interbank rate is the price at which major banks buy and sell foreign currency.

Under California's False Claims Act, anyone who has previously undisclosed information about a fraud, overcharge, or other false claim against the state, can file a sealed lawsuit on behalf of California to recover the losses. They must notify the Attorney General as well.

Brown launched his own probe, which resulted in the suit that was made public by a Sacramento Superior Court judge. The state investigation revealed that State Street was overcharging the two funds by charging at or near the highest rate of the day, even if the interbank rate was lower when the trade was put through, Brown said.

State Street derived its false exchange rates by taking the Interbank Rate at the time the trades were executed and adding or subtracting basis points depending on whether the funds were buying or repatriating foreign currency, the suit charged. When the funds acquired currency through State Street's custody FX program, State Street's false exchange rates often ranged 25 bps above or below the Interbank Rate and, in some cases, exceeded the Interbank Rate by 144 bps, Brown claimed.

No Time Stamp Data

California officials also charged that State Street concealed the fraud by failing to include time stamp data in its reports, so that the pension funds could not figure out the true execution costs by verifying when State Street actually executed the trades.

According to the charges, one State Street senior vice president said to another executive in commenting on the alleged deception that "…if providing execution costs will give [CalPERS] any insight into how much we make off of FX transactions, I will be shocked if [State Street] or anyone would agree to reveal the information."

According to the suit, State Street concealed the scheme by entering false exchange rates into its electronic trading databases, which automatically debited the pension funds' custodial accounts, and by reporting false exchange rates in numerous documents including FX Spot Purchase Activity Reports and account statements submitted to funds and their outside managers. State Street also put incorrect information into its database, the state alleged.

A copy of the state of California suit against State Street is here .