June 14, 2011
JULIE CARR SMYTH
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.”