State Street Corp. (STT), the third-largest custody bank, is being investigated by the U.S. Securities and Exchange Commission over its pricing of some foreign-exchange services, an issue that has drawn legal action from whistle- blowers and state officials.
The SEC, attorneys general and U.S. Attorney’s offices “have made inquiries or issued subpoenas concerning our foreign-exchange pricing,” the Boston-based company said in a regulatory filing made public May 9.
The firm has been sued by California and the Arkansas Teacher Retirement System for alleged fraud. The suits claim State Street secretly marked up the price of some foreign- exchange transactions. Those and similar suits against Bank of New York Mellon Corp. (BK) have brought scrutiny to currency transactions that could lead to lower revenue across the industry.
“State Street is responding to inquiries from various regulatory bodies regarding its foreign-exchange practices,” Hannah Grove, a spokeswoman, said in a telephone interview. “We will cooperate fully with the SEC in its inquiry” and “continue to defend ourselves against any allegations of wrongdoing.”
California said in October 2009 that State Street defrauded the state’s two biggest public pension funds of $56 million since 2001 by charging more than agreed on the transactions and concealing the overcharges by entering false exchange rates into its own databases and in documents. The state is seeking more than $200 million in damages and penalties. The California suit was initiated by Associates Against FX Insider Trading, a Delaware general partnership of unnamed whistle-blowers.
Harry Markopolos, the former money manager in Boston who tried for years to alert the SEC to Bernard Madoff’s Ponzi scheme, is helping the whistle-blower effort, a person with knowledge of the matter who asked not to be named said last month.
BNY Mellon, State Street’s largest rival, faces similar claims from Virginia, Florida and a public pension fund in Pennsylvania. BNY Mellon has denied the allegations and said it will defend against the suits.
Massachusetts’ chief securities regulator, Secretary of the Commonwealth William F. Galvin, is also examining the trades, according to spokesman Brian McNiff. Increased scrutiny could force custody banks to lower their fees for the service regardless of the legal outcomes, Glenn Schorr, an analyst at Nomura Holdings Inc., said in a March 22 research note.
The type of bundled foreign-exchange transactions that spurred the lawsuits accounted for $335 million in revenue in 2010, or about 3.7 percent of sales, Chief Financial Officer Edward Resch said at an April 19 earnings conference call.
Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. State Street also manages investments for individuals and institutions.
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