State Street Sued For "Unconscionable Fraud" Against Calpers And Calstrs

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From the Office of the California Attorney General:

Brown Sues State Street Bank for Massive Fraud Against CalPERS and CalSTRS

SACRAMENTO - Seeking to recover more than $200 million in illegal
overcharges and penalties, Attorney General Edmund G. Brown Jr. today
announced that he has filed suit against State Street Bank and Trust --
one of the world's leading providers of financial services to
institutional investors -- for committing "unconscionable fraud"
against California's two largest pension funds -- CalPERS and CalSTRS.

The suit, which was unsealed today by a Sacramento Superior Court
judge, contends that Boston-based State Street illegally overcharged
CalPERS and CalSTRS for the costs of executing foreign currency trades
since 2001.

"Over a period of eight years, State Street bankers committed
unconscionable fraud by misappropriating millions of dollars that
rightfully belonged to California's public pension funds," Brown said.
"This is just the latest example of how clever financial traders
violate laws and rip off the public trust."

The case was originally filed under seal by whistleblowers -
"Associates Against FX Insider Trading," who alleged that State Street
added a secret and substantial mark-up to the price of interbank
foreign currency trades. The interbank rate is the price at which major
banks buy and sell foreign currency.

Subsequently, Brown launched an independent investigation into the allegations.

Brown's investigation revealed that State Street was indeed
overcharging the two funds. Despite being contractually obligated to
charge the interbank rate at the precise time of the trade, State
Street consistently charged at or near the highest rate of the day,
even if the interbank rate was lower at the time of trade.

Additionally, State Street concealed the fraud by deliberately
failing to include time stamp data in its reports, so that the pension
funds could not determine the true execution costs by verifying when
State Street actually executed the trades. Commenting on this
deception, one State Street senior vice president said to another
executive that "…if providing execution costs will give [CalPERS] any
insight into how much we make off of FX transactions, I will be shocked
if [State Street] or anyone would agree to reveal the information."

Brown's office estimates that the pension funds were overcharged by
more than $56.6 million over eight years. The lawsuit asks for relief
in the amount of triple California's damages, civil penalties of
$10,000 for each false claim; and recovery of costs, attorneys' fees
and expenses. It is estimated that damages and penalties could exceed
more than $200 million.

Under California's False Claims Act, anyone who has previously
undisclosed information about a fraud, overcharge, or other false claim
against the state, can file a sealed lawsuit on behalf of California to
recover the losses. They must notify the Attorney General as well.

Such a case is called a "qui tam" case. If there is a monetary
recovery, the law provides that the whistleblower "qui tam plaintiff"
receives a share of the amount recovered if the requirements of the
statute are met.

A copy of the complaint is attached.

 

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