State Street Loses Effort to Dismiss Forex Lawsuit From Arkansas Pension Plan
State Street Corp., one of the world's largest custodian banks, has lost a bid to dismiss a lawsuit from an Arkansas pension fund that it overcharged on its foreign currency trades.
Last year, the Arkansas Teacher Retirement System accused State Street of concealing markups on forex trades made on behalf of the pension fund. In a suit filed with the U.S. district court in Boston, the Arkansas pension plan called State Street's foreign exchange practices "unfair and deceptive" by failing to give the best prices on forex deals. US District Judge Mark Wolf in Boston has now allowed the civil court case to proceed.
The bank, which faces similar claims by pension funds in other parts of the country, has repeatedly denied any wrongdoing and says it will fight the case. In regulatory filings, State Street disclosed it was under investigation by the U.S. Department of Justice, the Department of Labor and the U.S. Securities and Exchange Commission for its forex trade practices.
Pension funds and other big institutions need to trade currencies when they buy or sell foreign securities or collect non-dollar dividends or interest payments. Such trades are typically executed by custodian banks such as State Street and Bank of New York Mellon, also the target of similar lawsuits, based on what are called "standing instructions" giving the custodian bank some leeway on the price at which it executes the trades so it can earn revenues.
At the heart of all the cases is whether or not the banks earned too much on the forex deals and properly divulged their methodologies to customers. Pension plans have historically looked a blind eye to what custodian banks charged because they really either didn't have or didn't know how to find the necessary data to make any comparable analysis. Over the past few years a cottage industry of foreign exchange analytics shops and transaction cost analysis firms have cropped up to do the math providing the pension plans with some quantitative ammunition. Custodian banks counter they provide good value and are critical of the external methodologies. But State Street and BNY Mellon have publicly disclosed they are offering more information about their forex trading practices. BNY Mellon, for one, no longer uses the phrase "best execution" in commitments to customers.
State Street, alleges the Arkansas pension plan, generated as much as $500 milion in profits over the last decade based on fraudulent practices. In asking for a dismissal of the case, State Street compared its role to that of a discount warehouse which doesn't disclose how much it is marking up merchandise. Fund managers are sophisticated customers and behaved much like consumers who buy at bulk discount in warehouses such as Costco Wholesale Corp to save money. "Of course, Costco has no duty to disclose the actual relationship between what it pays for its goods and the prices at which it sells," says State Street in a memorandum. "This is equally true in FX."
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)
