By Rosalind S. Helderman
Washington Post Staff Writer
Friday, January 28, 2011;
B01
RICHMOND - Virginia Attorney Gen. Ken T. Cuccinelli II is alleging that a major New York financial institution defrauded the state's public pension fund by regularly overcharging for foreign currency trades.
Cuccinelli (R) intervened this week in a lawsuit brought by a private whistleblower that seeks $150 million in damages from the Bank of New York Mellon, which has served as the master custodian of the Virginia Retirement System since 1988.
The lawsuit, first filed in Fairfax County Circuit Court in October 2009 and unsealed by a judge on Monday, contends that since 2001 currency traders for the bank skimmed profits of transactions conducted on Virginia's behalf by falsely reporting the rate at which currency was exchanged.
According to the suit, the foreign exchange practices also involved Fairfax and Arlington counties' pension funds.
The suit has been filed under the Virginia Fraud Against Taxpayers Act, a 2002 statute designed to help root out public corruption. It is the same law that Cuccinelli has used in a controversial effort to compel the University of Virginia to turn over documents related to the work of a global-warming researcher.
"Based on the information the whistleblower provided and the information developed using the investigatory tools authorized in FATA, I determined that it was prudent to intervene in the case and protect the interests of the retirement fund beneficiaries," Cuccinelli said in a brief statement.
The bank is disputing the charges and will fight them in court, a spokesman said.
"We believe the lawsuit is without merit, and we intend to defend it vigorously," said Bank of New York Mellon spokesman Kevin Heine.
According to the attorney general's office, the bank is paid $4.5 million a year to hold and protect Virginia's pensions. It manages $55.1 billion in state and local government retirement funds.
The suit was initiated by a Delaware-based partnership called FX Analytics, whose members, according to the legal complaint, had "personal knowledge" of the fraud based on "extensive knowledge and experience" with Bank of New York Mellon.
Under Virginia law, whistleblowers can launch lawsuits against entities that they think have defrauded the government. The state can decide later whether to intervene in the suit. If the litigation results in a monetary judgment, the company would collect a portion of the settlement.
Zachary Kitts, an attorney for FX Analytics, declined to name its members but reiterated that they had direct knowledge of the bank's practices. He said they are pleased that Cuccinelli has intervened.
"We appreciate the time and effort the attorney general's office has put into investigating this," he said.
Cuccinelli can file a legal complaint or adopt the one lodged by FX Analytics. His office said he has not decided how to proceed and no briefing or hearing schedule has been set.
According to the attorney general's office, the Bank of New York Mellon would watch currency markets and conduct trades on behalf of Virginia at the most advantageous price it could find during a trading day. But when the bank reported the results of the trade to the state, it would report that the state had received the day's least advantageous price. It would then pocket the difference.
Most large public pensions have funds invested overseas that require them to conduct routine foreign currency exchanges.
John Galanek, chief operating officer of Massachusetts-based FX Transparency, said banks routinely apply implicit markups to such trades in unregulated markets, by inserting a hidden commission and by failing to report the time at which the trade took place.
"When the custodial banks are left unpoliced to execute those trades . . . economic incentives take over and the markups are massive," said Galanek, whose firm is hired by pension funds and others to monitor such trades.
It will be for courts to decide if the practice is fraudulent.
The Virginia suit is similar to one filed in California in 2009 by then-Attorney General Jerry Brown (D) against State Street, seeking $200 million in damages over the same foreign currency exchange practices.
At the time, Brown - since elected governor - said the bank had committed "unconscionable fraud" and cited it as an example of how "clever financial traders violate laws and rip off the public trust."
The California suit remains in litigation; State Street has denied wrongdoing in the case.
In October, Washington state announced that it had reached an $11.7 million settlement with State Street Bank, resolving a dispute over the same practices.
The spokesman for Bank of New York Mellon said he was aware of no similar lawsuit that had been filed against the bank.
In addition to the funds it holds for Virginia's pension fund, Bank of New York Mellon is also paid $400,000 a year to serve in the same role for the $4.9 billion Fairfax retirement system and receives almost $136,000 annually from Arlington to serve as custodian of the county's $1.27 billion pension.
Spokeswomen for both counties declined to comment and referred questions to Cuccinelli.
A spokeswoman for the Virginia Retirement System said Bank of New York Mellon's contract with the fund was renewed last year for five years. She referred questions to the attorney general's office.
heldermanr@washpost.com
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