State Street Bank and Trust Company, a financial institution, this week agreed to pay a total of $382.4 million to the United States to resolve allegations that it deceived some of its custody clients when providing them with indirect foreign currency exchange (FX) services.
As part of the settlement, State Street will pay $155 million to the Department of Justice for violations under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The government’s investigation arose from whistleblower claims
$167.4 million in disgorgement and penalties to the SEC; and at least $60 million to ERISA plan clients in an agreement with the Department of Labor.
As part of the settlement with the Justice Department, State Street admitted that contrary to its representations to certain custody clients, its State Street Global Markets division (SSGM) generally did not price FX transactions at prevailing interbank market rates. Instead, State Street admitted that SSGM executed FX transactions by applying a predetermined, uniform mark-up (if the custody client was a FX purchaser) or mark-down (if the custody client was an FX seller) to the prevailing interbank rate for FX.
State Street also allegedly falsely informed custody clients that it provided “best execution” on FX transactions, that it guaranteed the most competitive rates available on FX transactions and that it priced FX transactions based on a variety of factors when, in fact, prices were largely driven by hidden mark-ups designed to maximize State Street’s profits.
“State Street’s custody clients—many of whom were public pension funds, financial institutions and non-profit organizations—had a right to expect that State Street would execute transactions in an honest and forthright manner,” said U.S. Attorney Carmen Ortiz. “Instead, State Street executed FX transactions in a manner that enabled it to reap substantial profits at the expense of its custody clients.”
“When financial institutions charged with safeguarding retirement plan assets put the firm’s interests ahead of the best interest of their plan clients, or fail to candidly disclose fees, we will hold them accountable,” Secretary Thomas Perez of the Department of Labor.
State Street reached a separate agreement to settle the SEC’s investigation concerning State Street’s indirect FX services. Under the terms of that agreement, the SEC will enter an administrative order against State Street, only after the U.S. District Court gives final approval to State Street’s proposed settlement with private plaintiffs in pending securities class action lawsuits concerning its indirect FX pricing service.
The administrative order will find that State Street violated Section 34(b) of the Investment Company Act and caused violations of Section 31(a) of the Investment Company Act and Rule 31a-1(b) by providing its registered investment company (RIC) clients with trade confirmations and monthly transaction reports that were materially misleading in light of State Street’s representations about how it priced FX transactions.
Under the terms of the order, State Street will be required to disgorge $75 million in ill-gotten gains and $17.4 million in prejudgment interest, to be paid to RIC clients, and also pay the SEC a civil penalty of $75 million.
Labor Department settlement
State Street also is simultaneously resolving DOL’s claims under Employee Retirement Income Security Act (ERISA) by agreeing to pay at least $60 million to State Street’s ERISA plan customers who, DOL found, sustained losses in connection with the conduct alleged above. This amount will be distributed to ERISA plan customers in conjunction with the settlement of certain private class action lawsuits.
According to the DOL’s allegations, State Street made false or misleading representations concerning certain FX trades, and concealed from its plan customers how it priced those trades. In the settlement, State Street represents that it now makes and will continue to make detailed disclosures to its customers with respect to its FX pricing and that it now refrains and will continue to refrain from making representations regarding its FX pricing that are not accurate.
State Street will pay an additional $147.6 to resolve private class action lawsuits filed by the bank’s customers alleging similar misconduct.