State Street will stump up at least $382.4 million to settle allegations it deceived custody clients through fraudulent foreign exchange (FX) practices.
As part of its settlement with the US Department of Justice, State Street Bank and Trust Company admitted that its State Street Global Markets (SSGM) division failed to price FX transactions at the standard interbank market rates.
Instead, for certain custody clients SSGM applied a pre-determined and uniform mark-up, in the case of FX purchasers, or mark-down, in the case of sellers.
In a statement, State Street said it considered a settlement to be in the “best interests” of both the bank and its clients.
The Department of Justice also alleged that State Street falsely assured clients that it performed ‘best execution’ on its FX transactions, and that it ‘guaranteed’ the most competitive rates available.
SSGM also allegedly claimed to base the cost of FX transactions on a variety of factors when, in fact, costs were based largely on hidden mark-ups designed to maximise profits.
Carmen Ortiz, US attorney for the district of Massachusetts, where State Street is headquartered, said: “State Street’s custody clients, many of whom were public pension funds, financial institutions and non-profit organisations, had a right to expect that State Street would execute transactions in an honest and forthright manner.”
She added: “Instead, State Street executed FX transactions in a manner that enabled it to reap substantial profits at the expense of its custody clients. Today’s settlement reflects a significant and appropriate penalty for State Street’s deceptive conduct.”
The $382.4 million settlement includes $155 million to be paid to the department of justice as a civil penalty to resolve the allegations.
State Street will pay $75 million to the US Securities and Exchange Commission (SEC) in ‘ill-gotten gains’, plus a $75 million civic penalty and $17.4 million in pre-judgement interest to its Registered Investment Company clients.
At least $60 million will be paid to State Street’s Employee Retirement Income Security Act (ERISA) customers, who the US Department of Labor (DOL) found sustained losses through the alleged fraud.
State Street has also agreed to make detailed disclosures about its FX pricing going forward, and to refrain from making representations regarding FX pricing that are not accurate.
Mike Rogers, president and COO of State Street, commented: “Matters of this nature can drain both time and resources; so where possible and appropriate we feel it is in State Street’s and our clients’ best interests to pursue settlements.”
He added: “In 2009, we significantly strengthened our disclosures around indirect foreign exchange, including publishing the spread relative to indicative interbank market rates at the time of pricing, and today believe we provide our clients with the most comprehensive disclosures in the industry.”
Taking into account additional private lawsuits, State Street expects to pay approximately $530 million to settle claims, all of which will be covered by a previously established reserve.
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