California Attorney General Edmund Brown Jr. announced Tuesday that he has filed suit against State Street Bank and Trust for committing “unconscionable fraud” over an eight-year period with the state’s two largest pension funds.

The suit, which alleges State Street “illegally overcharged” the approximately $200 billion California Public Employees’ Retirement System (CalPERS) and the $126.9 billion California State Teachers’ Retirement System (CalSTRS), contends that the state is seeking to recover more than $200 million.

"We were pleased to cooperate with the Office of the Attorney General in its investigation and fully support the decision of the attorney general to prosecute these claims,” CalPERS spokesman Clark McKinley said in an email today.

According to Brown, Boston-based State Street misappropriated “millions of dollars that rightfully belonged to California’s public pension funds” by allegedly adding a “secret … substantial mark-up” to the price for interbank foreign currency trades. Interbank rates are the price at which major banks buy and sell foreign currency, Brown said in the release.

“This is just the latest example of how clever financial traders violate laws and rip off the public trust,” Brown said.

Despite being contractually obligated to include the exact time and rate for the exchanges, Brown’s independent investigation alleges that State Street “deliberately” failed to include a time stamp and charged the two pension funds the highest rate of the date even if it was lower at the time of the trade. Brown’s office estimates that the funds were overcharged by more than $56.6 million.

State Street, which is a leading provider of financial services to institutional investors, has more than $1.6 trillion in assets under management, and $16.4 trillion in assets under custody and administration as of June 30.

State Street spokesperson Marie McGehee issued a statement to Investment Management Weekly today on the matter.

“We categorically deny any allegations of wrongdoing and will defend ourselves against any litigation,” McGehee said.

The lawsuit asks for relief in the amount of triple California's damages, civil penalties and recovery of costs, attorneys' fees and expenses. Brown’s office estimates that the recovery could exceed more than $200 million. 


As of press time, attempts to reach CalSTRS for comment were unsuccessful.