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State Street, That Not-So-Great Street

October 22, 2009

California Attorney General Jerry Brown this week filed suit against Boston-based State Street Bank and Trust, the nation’s leading bank for retirement and pension funds, for “massive fraud” relating to investments held by California’s two largest pension funds, California Public Employees’ Retirement System and the California State Teachers’ Retirement System. The bank was investing in foreign currency on behalf of California PERS and the state Teachers Retirement System, while the pensions believed their money was in secure, long-term funds.

Brown called the bank’s action “just the latest example of how clever financial traders violate laws and rip off the public trust,” and stated the scheme was “Far more subtle and sophisticated than street robbery…but it has the same impact.”

State Street reportedly set aside $625 million for damages from lawsuits relating to its subprime losses, but by the end of March 2009 only $207 million remained in the reserve fund. California’s lawsuit is seeking about $200 million in repayments and damages. In 2008, analysts estimated State Streets’ damages could be anywhere from $1 billion to almost $8 billion. State Street asserts it did nothing wrong, and claims it can cover any damage awards with its reserves. On Tuesday, the bank announced a $516 million profit in the third quarter. State Street CEO Ronald Logue’s total compensation was more than $58 million in the past five years; in 2008 alone, President and COO Joseph L. Hooley’s compensation was more than $11.5 million.

As Brown noted, rip-offs like the State Street scheme have a lengthy history, particularly in complex foreign currency investments and other convoluted derivatives. In his 1997 expose F.I.A.S.C.O., former derivatives trader Frank Partnoy reported how traders at several leading Wall Street firms where he worked and/or observed would openly boast about raking in huge fees (and attendant grossly inflated salaries) while “ripping the face off of” customers (ie, screwing them).

This week’s California lawsuit grew from whistleblower reports accusing State Street of secretly marking-up their currency trading prices, costing clients around $400 million annually as far back as 1998. Internal State Street emails showed that company executives worried about revealing to the pensions funds “how much (money) we make off of” their foreign exchange trades. According to the New York Times, the whistleblowers produced documents showing that State Street referred to state pension funds as “dumb” clients who trusted the bank to handle the complex foreign trades for them.

The California suit is just the most recent among lawsuits on behalf of retirement plans feeling ripped off by State Street. In May 2008, Prudential sued the bank on behalf of another 200 retirement funds, charging State Street with making high risk investments while telling the funds that their money was invested safely. Suits by pension and retirement funds from across the country also charged the bank with manipulating investments and downplaying investment risks. In January 2009, the SEC notified State Street it had evidence sufficient to warrant civil charges relating to the bank’s subprime investments.

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