Ohio treasurer drops ties with 2 banks over claims they manipulated foreign exchange rates

3/19/2012

COLUMBUS— Ohio's treasurer has cut ties with two banks charged with overseeing the international assets of four of the state's five pension funds because of concerns the financial institutions may have manipulated foreign exchange rates, potentially costing beneficiaries millions of dollars.

State Street Corp. and Bank of New York Mellon Corp. had provided foreign investment services to the pension funds. As custodial banks, they typically handled foreign currency transactions on international investments on behalf of the funds.

Ohio Treasurer Josh Mandel on Monday picked Citibank and JP Morgan Chase to oversee the $41.3 billion of the pensions' international assets.

The replacement comes after the state's attorney general filed a lawsuit last week against BNY Mellon, alleging fraud, deceptive trade practices and other misdeeds in the handling of the state's retirement funds for police officers, firefighters and school employees.

Investigators in Attorney General Mike DeWine's office say the funds were overcharged when the bank improperly used exchange rates most favorable to the bank to convert U.S. funds into foreign currency for stock purchases.

The School Employees Retirement System of Ohio and the Ohio Police & Fire Pension Fund are seeking damages in excess of $16 million for losses the state alleges were incurred by the funds as a result of BNY Mellon's practices.

Kevin Heine, a spokesman for BNY Mellon, said Monday the company was disappointed by the treasurer's action because "we believe we have provided the state with valuable services at competitive prices."

Heine said the state's lawsuit "recycles baseless allegations."

"We are confident we are right on the facts and the law," he said.

The attorney general's office is continuing to review State Street's foreign currency practices, a DeWine spokeswoman said.

A State Street spokeswoman said the company offers its clients a range of foreign exchange execution options, and those clients then decide what best addresses their needs. "The State of Ohio remains a valuable client of State Street and we will not otherwise comment on our relationship with the State," Alicia Curran Sweeney said in a statement.

In June, Mandel asked the state's attorney general to investigate whether the banks engaged in improper currency-trading practices "to maximize the banks' profits, at the expense of Ohio public servants, businesses and taxpayers."

His inquiry followed action by other states, including California, Florida, North Carolina, Virginia and Massachusetts, that pursued their own reviews or lawsuits against the two rival banks that provide foreign investment services to their pensions and other investment funds.

"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," Mandel said in a written statement.

Mandel said in a Monday interview that he planned to continue to work with the attorney general to eliminate relationships with any banks who are not putting the Ohioans' best interests first.

Almost 406,000 retirees, beneficiaries and dependents currently draw from the four pension funds.

The international portfolios of Ohio's public employee, state teachers and police and fire pension funds had been handled most recently by State Street, while the school employees' pension fund used BNY Mellon.

The state's fifth public employee retirement fund, covering Ohio Highway Patrol retirees, holds no foreign investments.

Monday's change in custodianship of the pension funds' international assets was formally announced as the state's Board of Deposit was meeting.

JP Morgan Chase will handle the international assets of the Ohio Public Employees Retirement System and the Ohio Police & Fire Pension Fund. Citibank will be the custodians for the international securities of the School Employees Retirement System and State Teachers Retirement System.