The Virginia Attorney General’s Office is considering whether or not to sue The Bank of New York Mellon for allegedly defrauding the state’s public pension fund by overscharging for foreign exchange transactions.

“We have the option of either filing our own lawsuit or working with an existing lawsuit,” Brian Gottstein, a spokesman for Virginia Attorney General Ken Cuccinelli II told Securities Technology Monitor on Friday.

The lawsuit, first filed in Fairfax County Court in October 2009, was unsealed on January 24. The suit filed by a company calling itself FX Analytics, alleges that since 2001 currency traders for the Bank of New York falsely report the rates at which it executed foreign exchange transactions on behalf of Virginia state pension plans. The lawsuit says that the fraud involved a state public pension plan and the pension funds of Fairfax and Arlington counties.

“We believe the lawsuit is without merit and we intend to defend it vigorously,” says Kevin Heine, a spokesman for BNY Mellon in New York. Zachary Kitts, an attorney for FX Analytics, could not be reached by press time.

The lawsuit in Virginia was filed under the Virginia Fraud Against Taxpayers Act adopted in 2002 which is designed to root out public corruption. “Based on the information the whistleblower provided and the information developed using the investigatory tools authorized in FATA, I determined that it was prudent to intervene in the case and protect the interests of the retirement fund beneficiaries,” said Cuccinelli in a press statement.

Under Virginia law, a whistleblower can launch a lawsuit against a firm it believes has defrauded the government and the state can decide whether or not it wants to intervene. The whistleblower can then collect a portion of any settlement.

The Virginia lawsuit is similar to the one filed in California in 2009 by former Attorney General Jerry Brown against State Street on behalf of the state’s two largest pension plans. The suit sought $200 million in damages over the similar foreign currency exchange practices and is still pending. State Street has denied any wrongdoing.

In October 2010, Washington State said it had reached an $11.7 million settlement with State Street Bank to resolve a dispute also involving its foreign exchange execution practices. At that time, State Street said there was a difference between the cases involving California and Washington State.

Pension plans typically use foreign exchange transactions to repatriate funds, either when income is received or a security or when one gets sold. Foreign exchange can also be used if domestic funds must be converted to another currency to buy a security. Some fund managers are capable of executing their own forex transactions but many do rely on their custodian banks; those banks such as BNY Mellon and State Street can execute anywhere from a handful to several thousand trades monthly for each pension plan they service.

The banks make their money imposing a spread between the money put into or taken out of a security and what is taken out or put into a client’s account. The wider the spread, the more profit the banks make. Although fund managers are trading foreign currency under the assumption they are getting competitive interbank rates from their custodians which hold their assets, that’s not often the case, say forex experts.