US states are stepping up probes into whether banks overcharged public pension funds millions of dollars in converting currencies for securities trades, a lucrative area of banking.
Officials in Florida, Virginia and California are examining foreign-exchange fees paid by state retirement systems and they are getting help from would-be whistleblowers who have filed private lawsuits against Bank of New York Mellon Corp and State Street Corp.
Florida Attorney General Pam Bondi on Thursday filed a state court notice of intervention in a case involving Bank of New York Mellon, according to a court filing.
“The AG’s office is investigating this practice,” spokeswoman Jennifer Krell Davis said in an e-mail.
Foreign exchange traditionally has been a rich source of revenue for US banks, particularly custodial banks, which not only profit from buying international stocks and bonds for pension funds and other investors, but also on trading dollars into other currencies. Foreign exchange overall is a huge business, with average daily volume of US$4 trillion.
States are examining whether banks charged their pension plans false exchange rates for foreign currency trades rather than the actual rates.
Washington state announced in October it had recovered US$11.7 million from State Street after a dispute over foreign exchange trade costs from 1997 to 2007.
The Florida lawsuit and others are tied to financial investigator Harry Markopolos, best known for trying to warn regulators that Bernard Madoff was running a fraud, said Patrick Burns, spokesman for Taxpayers Against Fraud, a Washington group that has worked with Markopolos.
The same whistle-blower that sued State Street in a California lawsuit, FX Insider Trading, also sued the company in a New York state court, according to legal database Westlaw, part of Thomson Reuters. The New York case was filed in April 2008, about a week after FX launched the California case.
Investors have long complained about dealers hoarding pricing information in foreign exchange and other over-the-counter markets. Part of last year’s Dodd-Frank financial reform law is geared at improving transparency in over-the-counter derivatives.
“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,” said Sang Lee, who specializes in foreign exchange market research at advisory firm Aite Group in Boston. “Overall, I think the potential is there for this investigation to become really widespread.”
The Florida lawsuit and a similar case in Virginia were brought by an entity called FX Analytics, which has ties to Markopolos, the Boston-based investigator whose warnings to regulators on Madoff went unheeded for years.