Boston-based State Street Bank and Trust Co. has agreed to pay $382.4 million, of which $60 million will go to ERISA plan clients, to settle allegations that it deceived some of its custody clients when providing them with indirect foreign currency exchange services.

The settlement, in which State Street will pay $155 million to the U.S. Department of Justice, $167.4 million in disgorgement and penalties to the Securities and Exchange Commission and at least $60 million to Employee Retirement Income Security Act plan clients in an agreement with the U.S. Department of Labor, was reached after State Street admitted that its State Street Global Markets division generally did not price foreign exchange transactions at prevailing interbank market rates — which was contrary to how State Street presented the pricing to certain custody clients.

An SEC investigation found that State Street brought in substantial revenues by misleading these custody clients about Indirect FX, telling them that it guaranteed the most competitive rates available on their foreign currency exchange trades, provided “best execution” or charged “market rates” on the transactions.

Instead, State Street set prices largely driven by predetermined, uniform markups (if the custody client was a foreign exchange purchaser) or markdowns (if the custody client was an FX seller) and made no effort to obtain the best possible prices for these clients. In fact, prices were largely driven by hidden markups designed to maximize State Street’s profits.

“State Street’s custody clients, many of whom were public pension funds, financial institutions and nonprofit organizations, had a right to expect that State Street would execute transactions in an honest and forthright manner,” U.S. Attorney Carmen M. Ortiz for the District of Massachusetts said in a statement.

Ortiz continued, “Instead, State Street executed FX transactions in a manner that enabled it to reap substantial profits at the expense of its custody clients. Today’s settlement reflects a significant and appropriate penalty for State Street’s deceptive conduct.”

To resolve the Labor Department's claims under the Employee Retirement Income Security Act, State Street agreed to pay at least $60 million to its ERISA plan customers who, the Department of Labor found, sustained losses in connection with the foreign exchange pricing detailed above. This amount will be distributed to ERISA plan customers in conjunction with the settlement of certain private class action lawsuits.

The Labor Department alleges in the settlement that State Street made false or misleading representations concerning certain foreign exchange trades, and concealed from its plan customers how it priced those trades. In the settlement State Street represents that it now makes and will continue to make detailed disclosures to its customers with respect to its foreign exchange pricing and that it now refrains and will continue to refrain from making representations regarding its foreign exchange pricing that are not accurate.

In addition to the abovementioned penalties, State Street will pay an additional $147.6 million to resolve private class action lawsuits filed by the bank’s customers alleging similar misconduct.

Instant Insights /

State Street to pay ERISA plan clients $60 million in settlement

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