The U.S. government finally heard Madoff whistleblower Harry Markopolos loud and clear.
Markopolos, and his whistle-blower group Associates Against FX Insider Trading, were key players in a $530 million settlement announced Wednesday against State Street Bank and Trust Company for allegedly cheating several government bodies on the pricing of their foreign exchange transactions. Markopolos declined to comment.
In a joint announcement on Wednesday the DOJ, SEC, and DOL said that State StreetSTT, +2.67% will pay $382.4 million, including $155 million to the Department of Justice, $167.4 million to the SEC and at least $60 million to pension plan clients to settle allegations that it deceived some securities custody clients on when it priced foreign currency exchange transactions. The alleged misconduct took place from 1998 to 2009.
The bank also agreed to pay $147.6 million to settle private class action lawsuits filed by bank customers alleging similar misconduct, the Justice Department said.
Markopolos’ group filed its largest forex case originally in California, on behalf of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System. That suit was settled last November. Additional cases filed via False Claims Act whistleblower statutes in Virginia, Florida, New York State and Washington state have also already settled. Markopolos and his group have already been paid for their whistleblower efforts based on those settlements.
The payouts conclude almost all of the investigations State Street has faced since 2009, when Markopolos filed the California lawsuit. Associates Against FX Insider Trading and Markopolos are not named in the latest State Street settlement announcements, but Markopolos has previously acknowledged his involvement in the case.
State Street safeguards clients’ securities as part of its custody business and offers indirect foreign currency exchange trading when clients buy and sell foreign currencies as needed to settle transactions, such as interest and principal payments from foreign bond issuers.
State Street admitted in its settlement with the DOJ that it generally did not price FX transactions at prevailing interbank market rates, contrary to what it told certain custody clients. State Street admitted that FX transactions were marked-up or marked-down from the prevailing interbank rate.
State Street allegedly misrepresented to 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. Instead prices were largely driven by hidden mark-ups that maximized State Street’s profits.
Markopolos has also filed a whistleblower claim in the SEC case. It may be at least two more years before that payout occurs based on similar cases.
A State Street Bank spokeswoman said that the negotiated settlement agreements are expected to resolve, subject to the courts’ final approval, the pending litigation and regulatory matters in the United States related to its indirect foreign exchange business.
“Each agreement depends upon certification, for settlement purposes, of a class of State Street’s custody customers that executed indirect foreign exchange transactions with State Street between 1998 and 2009, and final approval by the United States District Court for the District of Massachusetts of the settlement agreement between State Street and the class,” she said. “Matters of this nature can drain both time and resources; so where possible and appropriate we feel it is in our and our clients’ best interests to pursue settlements. Our previously established reserve will be sufficient to cover all costs associated with these agreements.”
Since the lawsuits were filed the foreign exchange markets have gone from an opaque, manual quote market to a fully electronic market where real-time quotes and historical information is available to institutional and retail customers. Every major bank that acts as a forex dealer has its own quoting and execution platform and multi-dealer platforms have sprung up that offer competitive quoting on worldwide currencies.
Checking on rates in advance or verifying after the fact was very difficult to do in the past. Calling around for competitive rates opened a customer up to potential front-running of the trade by other dealers.
He and other whistle-blowers filed a similar case against Bank of New York Mellon Corp. BK, -0.25% in Massachusetts. A lawsuit filed on behalf of the New York City pension funds by New York Attorney General Eric Schneiderman in 2011 against Bank of New York Mellon Corp for allegedly shortchanging the funds in foreign currency exchange transactions is still pending.
The New York City BONY Mellon suit is the last open forex case for the Markopolos group.
The SEC has already fined Bank of New York Mellon $30 million in June for misleading certain of its custodial clients about pricing when executing standing instructions for foreign currency transactions.
Markopolos spent years on Bernie Madoff’s trail and tried to warn regulators about the fraud, but he was largely ignored. It’s a frustrating experience he documented in his book, No One Would Listen: A True Financial Thriller.
