The state of Ohio today fired Bank of New York Mellon Corp. and Boston-based State Street Corp. as custodian banks for $41 billion in the state’s public pension funds, in the wake of allegations that both firms have overcharged clients for foreign exchange services.
Ohio’s attorney general last week filed a lawsuit against BNY Mellon in a bid to recoup $16 million that the state’s pension funds allegedly overpaid on foreign currency trades.
BNY Mellon said in a statement, “We’re disappointed by the treasurer’s actions because we believe we have provided the state with valuable services at competitive prices. As we have stated previously, the suit by the Ohio Attorney General recycles baseless allegations, and we are confident we are right on the facts and the law.”
BNY Mellon also is facing lawsuits in other states, including a $2 billion case brought by New York’s attorney general. In Massachusetts, Secretary of State William F. Galvin has sued the New York bank for $29 million on behalf of the state pension fund. State Street is facing similar inquiries from New York officials and in other cities and states, including California.
State Street said in a statement, “The State of Ohio remains a valuable client of State Street and we will not otherwise comment on our relationship with the state.”
The company also said it offers clients a range of foreign exchange options and believes clients have chosen the options that meet their needs.
Ohio State Treasurer Josh Mandel said in an announcement that his office had replaced State Street and BNY Mellon with Citibank and JP Morgan as custodians. Banks that handled foreign exchange in the past often charged higher prices on small trades and on exchanges of certain currencies. The scrutiny brought to this practice by a group led by whistleblower Harry Markopolos has prompted pension funds and other large investors to insist on the best prices for a far larger portion of these trades.
Purchases of foreign stocks by large investment funds trigger routine currency trades; for instance, if a fund wants to buy stock in South Korea, it must have local currency with which to buy those shares.
Mandel, in a statement, said, “As the chief watchdog of Ohio’s tax dollars, I feel a responsibility to root out fraud wherever I see or smell it. The pattern of fraud that has been detailed and alleged across the country against banks entrusted to safeguard funds for Ohio teachers, police, firefighters, and retirees is an extreme breach of the public trust.”