Ohio probe sought in pensions’ currency dispute

JULIE CARR SMYTH

Asso­ci­ated Press

COLUMBUS, Ohio — Ohio Trea­surer Josh Man­del has asked for a state inves­ti­ga­tion into whether banks may have manip­u­lated for­eign exchange rates charged to Ohio pen­sion funds and the state’s injured worker insur­ance, poten­tially cost­ing pen­sion­ers and busi­nesses tens of mil­lions of dol­lars over the past 12 years.

In a let­ter Tues­day to Ohio Attor­ney Gen­eral Mike DeWine, Man­del said he is con­cerned that the banks may have engaged in improper currency-trading prac­tices “to max­i­mize the banks’ prof­its, at the expense of Ohio pub­lic ser­vants, busi­nesses and taxpayers.”

The request comes as a grow­ing num­ber of states are pur­su­ing either inves­ti­ga­tions or law­suits against two rival banks that pro­vide for­eign invest­ment ser­vices to their pen­sions and other invest­ment funds: State Street Corp. and Bank of New York Mel­lon Corp. Other states include Cal­i­for­nia, Florida, North Car­olina, Vir­ginia and Massachusetts.

The U.S. Secu­ri­ties and Exchange Com­mis­sion and the U.S. Attorney’s office also are inves­ti­gat­ing, accord­ing to a May reg­u­la­tory fil­ing by State Street.

Bank of New York spokesman Kevin Heine said the com­pany had no com­ment. A mes­sage was left seek­ing com­ment from State Street.

Four of Ohio’s five pub­lic pen­sion funds — the Ohio Pub­lic Employee Retire­ment Sys­tem, School Employ­ees Retire­ment Sys­tem of Ohio, State Teach­ers Retire­ment Sys­tem of Ohio and the Ohio Police & Fire Pen­sion Fund — have inter­na­tional invest­ments han­dled by one of the two banks. Com­bined, they have roughly $39 bil­lion invested in inter­na­tional securities.

The Ohio Bureau of Work­ers’ Com­pen­sa­tion hasn’t held inter­na­tional invest­ments since it was hit by a 2005 scan­dal, but Man­del said he’d like to know if exchange rates were manip­u­lated prior to that time.

Man­del, a Repub­li­can who took office in Jan­u­ary, said his office only serves as cus­to­dian of the funds; the pen­sion sys­tems han­dle their own invest­ment deci­sions. But it is his respon­si­bil­ity to see that the state’s funds are prop­erly handled.

“I feel an oblig­a­tion to sound the alarm and ring the bell when I feel that some­one is tak­ing advan­tage of the tax­pay­ers,” Man­del told The Asso­ci­ated Press. “So I feel one of my duties as watch­dog of tax dol­lars and also retire­ment dol­lars, I feel oblig­ated to ini­ti­ate an inves­ti­ga­tion into whether or not some of these banks have been manip­u­lat­ing for­eign cur­rency exchange trans­fers in order to bilk taxpayers.”

Cus­to­dial banks like State Street and Bank of New York typ­i­cally han­dle for­eign cur­rency trans­ac­tions on inter­na­tional invest­ments on behalf of their client pen­sion funds. The busi­ness has been a sig­nif­i­cant source of their revenue.

Cal­i­for­nia sued State Street in Octo­ber 2009, seek­ing to recover $200 mil­lion from the bank for “ille­gal over­charges” and “fraud” against the state’s two largest pen­sion funds, CalPERS and Cal­STRS. The law­suit alleges that State Street charged the funds the high­est exchange rate of the day, even if the rate at the time of the trade was lower. Accord­ing to the suit, the bank then hid evi­dence of the fraud by not includ­ing time data in its reports, so the pen­sion funds couldn’t find out the actual exchange rate at the time of the trade.

Wash­ing­ton state set­tled with State Street last Octo­ber, receiv­ing $11.7 mil­lion from the bank over for­eign exchange trans­ac­tions that were exe­cuted between 1997 and 2007 for the Wash­ing­ton State Invest­ment Board, a $53 bil­lion pen­sion fund for the state’s teach­ers, law enforce­ment offi­cers, fire­fight­ers, school employee and judges.

Florida, Vir­ginia, and Mass­a­chu­setts are prob­ing for­eign exchange ser­vices at Bank of New York. Attor­neys gen­eral in Cal­i­for­nia, Florida and Vir­ginia took over whistle-blower lit­i­ga­tion on the issue.

In a report issued Mon­day, Mass­a­chu­setts Trea­surer Steve Gross­man and Mass­a­chu­setts Pen­sion Reserves Invest­ment Man­age­ment direc­tor Michael Trot­sky said the bank over­charged the state’s pen­sion reserves invest­ment man­age­ment board by more than $20 mil­lion for for­eign exchange ser­vices between Jan. 1, 2007 and May 11, 2011.

Both banks do work for Ohio pen­sion funds.

The inter­na­tional port­fo­lios of Ohio’s pub­lic employee, state teach­ers and police and fire pen­sion funds are all han­dled by State Street. SERS uses BNY Mel­lon. The state trea­sury itself holds no for­eign invest­ments, said Seth Met­calf, the treasurer’s gen­eral coun­sel and direc­tor of legal and finan­cial affairs.

The state’s fifth pub­lic employee retire­ment fund, cov­er­ing Ohio High­way Patrol retirees, holds no for­eign invest­ments, Met­calf said.

Alle­ga­tions in Ohio are sim­i­lar to those elsewhere.

“Rather than charg­ing the mar­ket rate at the time of the order, these banks may have inflated their prof­its by charg­ing close to the high­est or low­est prices of the day depend­ing on what was advan­ta­geous to them, not their client,” Man­del wrote in his let­ter. “If these banks engaged in this prac­tice, the net result over thou­sands of inter­na­tional trans­ac­tions and more than a dozen years might be that Ohio pen­sion­ers and busi­nesses paid tens of mil­lions of dol­lars more than mar­ket rates.”

Posted by AP News on Jun 14 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.