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Bank overcharged pension fund by $20m, state says

By Beth Healy
Globe Staff / June 14, 2011

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Massachusetts officials yesterday alleged that the state pension fund was overcharged by at least $20 million over the past four years as a result of foreign-currency trading abuses by Bank of New York Mellon Corp.

State Treasurer Steven Grossman announced the allegations after receiving results of an outside audit of the trading expenses. His office had ordered the audit following a wave of lawsuits around the country against large banks that handle foreign-exchange trades on stock transactions.

“This has clearly been a rampant practice of bad behavior,’’ Grossman said at a press conference. “I think there is a violation of the public trust that has taken place.’’

Grossman said he would meet with state Attorney General Martha Coakley this week to discuss all possible remedies. He declined to say for sure whether the state would sue.

BNY Mellon, which has large operations in Massachusetts, denied the allegations and said it was “disappointed’’ the pension fund had taken this step.

“Describing our pricing as ‘overcharging’ is wrong and ignores the substantial, cost-effective benefits our service provides to our custody clients and their professional investment managers,’’ a BNY Mellon spokesman said in a statement. He said the company values its relationship with the state and hopes “to work with them to address their concerns.’’

Since 1999, BNY Mellon has been the custodian of the Massachusetts pension fund, which has about $50 billion in assets. Many of the investment firms that buy stocks, bonds, and other securities for the fund use Mellon to exchange currency in particular markets where they invest.

According to Grossman, the consultant, FXTransparency of Framingham, examined trades from January 2007 through May 11 of this year. State officials have now asked FXTransparency to go back to 2000 to review foreign-exchange costs.

Last year, Coakley declined to join lawsuits filed against Mellon and Boston-based State Street Corp. over foreign-exchange pricing. The lawsuits were brought by whistle-blowers who alleged a pattern of overcharging.

Yesterday, Coakley spokesman Brad Puffer said, “The treasurer’s office has shared this information with us today and we are actively reviewing it with them.’’

The treasurer’s audit comes as both Mellon and State Street face regulatory inquiries and lawsuits over their foreign-exchange charges, in particular for smaller trades in emerging markets. Both companies are custodians for many pensions, handling trillions of dollars in back-office accounting and record-keeping on investment transactions.

State Street has denied wrongdoing and has said it is cooperating with regulators.

According to the audit outlined by state officials, BNY Mellon allegedly charged the pension fund’s investment managers 30.9 basis points on thousands of foreign-exchange trades, or 0.31 percent. That compared with the 2.2 basis points, or 0.02 percent, the fund pays on larger trades its investment managers negotiate directly.

BNY Mellon’s spokesman called the report “fundamentally flawed and misleading,’’ because it compares rates on negotiated trades with the smaller, non-negotiated trades on which banks have been charging higher prices. He added that, “it is the investment managers, not BNY Mellon, who choose whether to use standing instruction or direct negotiation.’’

Michael Trotsky, chief of the state’s pension fund, said his office will be reviewing those investment manager relationships as well. He said increased transparency in foreign-exchange pricing is positive for investors: “It’s taking the wild west out of it,’’ Trotsky said.

Beth Healy can be reached at bhealy@globe.com.