State Street Bank to Pay $382m in Settlement of Fraudulent Forex Activities

The bank has been ordered to pay penalties for a series of violations relating to clients’ fx transactions.

In an investigation that arose from whistleblowers, US-based State Street Bank and Trust Company has agreed to pay a minimum of $382.4 million, including $155 million to the Department of Justice, $167.4 million in disgorgement and penalties to the US Securities and Exchange Commission (SEC) and at least $60 million to clients to settle allegations of deception when providing clients with indirect foreign currency exchange (FX) services.

Misleading Information

State Street admitted that contrary to its representations to certain clients, its State Street Global Markets division generally did not price FX transactions at prevailing interbank market rates.

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Instead, State Street admitted that it executed FX transactions by applying a predetermined, uniform mark-up if the custody client was a FX purchaser, or mark-down if the custody client was an FX seller, to the prevailing interbank rate for FX.  

State Street is also alleged to have falsely informed custody clients that it provided “best execution” on FX transactions, that it guaranteed the most competitive rates available on FX transactions and that it priced FX transactions based on a variety of factors when, in fact, prices were largely driven by hidden mark-ups designed to maximise State Street’s profits.

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During the court hearing, the judge said: “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.”

He continued: “State Street misled custody clients about how it priced their trades and tucked its hidden markups into a corner where they were unlikely to notice,” said Director Ceresney.  “Financial institutions cannot mislead their customers about their trading costs.”

SEC Investigation

The SEC has approved a separate agreement to settle the SEC’s investigation concerning State Street’s indirect FX services.  Under the terms of the agreement, the Commission will enter an administrative order against State Street after the court gives final approval to State Street’s proposed settlement with private plaintiffs in pending securities class action lawsuits concerning its indirect FX pricing service.  

Under the terms of the order, State Street will be required to pay back $75 million including $17.4 million in prejudgment interest to clients and also pay the SEC a civil penalty of $75 million.

 

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