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Foreign Exchange Fraud

State Street Building

State Street Bank and Trust Company has agreed to pay at least $382.4 million to settle allegations that it skimmed profits from clients on foreign currency exchange (FX) transactions. The Boston, Massachusetts-based financial institution will pay at least $382.4 million in civil penalties and fines to settle the foreign exchange fraud allegations, as well as an additional $147.6 million to resolve private class action lawsuits alleging similar misconduct, bringing the total from all settlements to roughly $530 million.

The State Street settlements are an attempt to put an end to foreign exchange fraud investigations that the bank has faced since 2009, when Wall Street whistleblower Harry Markopolos initially filed a whistleblower lawsuit in California on behalf of one of the country’s largest pension funds. Mr. Markopolos later went on to file whistleblower lawsuits in Massachusetts and other states, making similar allegations of foreign exchange fraud. You may recognize Mr. Markopolos’ name, as he was the whistleblower that repeatedly tried to alert authorities about Bernie Madoff’s scheme.

According to the Justice Department, State Street has admitted that its State Street Global Markets division generally did not price foreign currency exchange (FX) transactions at prevailing interbank market rates, contrary to representations the bank made to its clients.

Instead, when the State Street Global Markets division executed foreign currency exchanges, it allegedly applied predetermined uniform markups and markdowns to prevailing interbank FX transaction rates. When a client was an FX buyer, the Justice Department claims, State Street applied a markup, and when the client was a seller, the bank applied a markdown.

State Street is also accused of falsely telling its clients that the bank was providing “best execution” on FX transactions, and that it guaranteed the most competitive available rate on FX transactions, when, in fact, the prices that clients paid on FX transactions included these hidden markups or markdowns boosted State Street’s profits at the expense of their own clients.

According to media reports, the alleged foreign exchange fraud scheme took place between 1998 and 2009. Many of the clients that were affected by the foreign exchange fraud allegations were public pension funds, financial institutions and non-profit organizations.

State Street agreed to pay $382.4 million, pursuant to proposed settlements and other agreements. Of that total, $155 million will be paid as a civil penalty to the U.S. government, pursuant to allegations made by the Justice Department that State Street violated the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).

In a separate agreement with the Securities and Exchanges Commission (SEC), State Street will be required to pay the SEC a civil penalty of $75 million, as well as disgorge $75 million in ill-gotten gains and $17.4 million in prejudgment interest, which will be paid to registered investment company (RIC) clients.

In addition to the above agreements, State Street will resolve Department of Labor (DOL) claims under the Employee Retirement Income Security Act (ERISA) by paying at least $60 million to State Street ERISA plan clients who lost money as a result of the bank’s alleged foreign exchange fraud.

Finally, State Street has agreed to pay an additional $146.7 million to resolve private class action lawsuits filed on behalf of clients who also claim to have lost money as a result of the foreign exchange fraud.

All of the settlements laid out above have yet to be finalized.

Foreign Exchange Fraud Whistleblower

For his role in bringing the foreign exchange fraud allegations to the government’s attention, Mr. Markopolos will receive a whistleblower reward that has yet to be determined. The case against State Street one of a number of whistleblower lawsuits that Markopolos has filed against Wall Street banks.

Mr. Markopolos and a number of other whistleblowers were instrumental in a similar case that resolved last year involving Bank of New York Mellon, which agreed to pay $714 million to resolve claims that it cheated pension funds and other investors for over a decade.

In March of 2015, authorities resolved claims that accused Bank of New York Mellon of telling clients that they would receive the best possible rate on foreign currency trades when, in fact, the bank provided prices that were at or near the worst interbank rates. The suspected foreign exchange fraud scheme lasted from 2000 until 2011.

While the $714 million settlement might sound like a lot of money, it amounts to only a fraction of the allegedly ill-gotten gains that New York attorney general Eric Schneiderman was seeking. According to the New York Times, the victims of the Bank of New York Mellon scheme included New York City pension funds, with investors that include teachers and police officers.

The Bank of New York Mellon case actually had an interesting tie-in to the State Street case. When news of the State Street case was initially reported back in 2009, Bank of New York Mellon employees began to worry. In an email with the subject ‘Oh No’ sent to colleagues, a Bank of New York Mellon managing director shared the State Street news. Another email, sent by an employee who has since left the bank, wondered whether it was “time to retire after raping the custodial accounts.”



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