Florida prosecutors are investigating charges that a major New York bank hired to safeguard retirees' savings cheated them by overcharging for currency-exchange trades.
Attorney General Pam Bondi plans to take over a whistleblowers' lawsuit alleging that the Bank of New York Mellon defrauded Florida's pension fund with the secret markup on billions of dollars, collecting a higher currency-conversion price than it actually got and pocketing the difference. The whistleblowers filed a similar lawsuit in Virginia.
"On behalf of the state of Florida, we will not tolerate these actions and they will be held accountable,'' Bondi said in a statement.
She declined further comment and did not say how much money allegedly had been siphoned by the bank, which has custody of $150 billion in Florida taxpayer assets belonging to more than 1 million current and future retirees and hundreds of cities, counties, state agencies and school districts. But experts familiar with custodian banks' currency-exchange practices said the losses could amount to tens of millions of dollars.
A BNY Mellon spokesman said that the allegations are without merit and that the bank will vigorously defend itself.
Bondi's decision to pursue a civil case was sparked by the whistleblowers who sued the bank in Tallahassee in November 2009. That lawsuit remains under seal, something required for false claim lawsuits brought by private citizens unless a judge orders otherwise.
Bondi filed a motion Thursday asking a judge to unseal this one. The motion also said the attorney general's office had completed a review of documents supplied by the whistleblowers and concluded the state should take over the case. The state will file its own complaint soon.
Last month, Virginia Attorney General Ken Cuccinelli joined a similar lawsuit filed by the same confidential whistleblowers, who have banded together in a Delaware shell company that they call FX Analytics. Zachary Kitts, a lawyer for the whistleblowers, declined to comment.
Virginia's complaint accuses BNY Mellon of regularly reporting false currency-exchange costs to hide the fact it was profiting from the trades. It seeks $150 million in damages.
The Wall Street Journal identified one of the whistleblowers as Harry Markopolos, a Boston investor who uncovered Bernie Madoff's Ponzi scheme 10 years before regulators went after him.
SBA and BNY Mellon
For years, the State Board of Administration, which manages public investments, has been plagued by lapses in oversight. Like a lot of pensions, Florida lost money during the market meltdown. The pension now has rebounded to assets totaling more than $125 billion. Despite recent gains, however, the pension fund is still in the red.
Bondi doubles as a trustee overseeing the SBA. This week, fellow trustee Gov. Rick Scott announced a pension overhaul that would require thousands of state and local employees to contribute 5 percent of their salaries toward their retirements.
A spokesman said Scott was aware of Bondi's actions on the whistleblowers' case and "fully supports holding the vendors accountable.''
In hiring BNY Mellon in 2005, then-executive director Coleman Stipanovich said the SBA had lowered its costs.
On Friday, the SBA said it has paid the bank more than $35 million in fees since 2005. That does not include currency-exchange revenue, which is a growing source of profits for the bank in Florida because the state's pension fund has been boosting its investments abroad.
In the past 22 months, records show, SBA executive director Ash Williams approved documents that helped Mellon conduct trading for the SBA in Bulgaria, the United Arab Emirates, Romania, Tunisia and Kuwait.
Even before the whistleblowers' lawsuit, SBA managers questioned some of Mellon's practices and the agency's own controls.
In August 2009, an internal audit flagged troubles with Mellon's SBA contract and the way the bank checked and reconciled the values of billions of dollars in securities.
Overvalued assets can hide losses and allow fund managers to collect higher management fees. The SBA agreed to tighten its monitoring.
The whistleblowers in Florida and elsewhere are bringing their cases under state False Claims Acts, which allow citizens to recover funds lost because of fraud in government programs.
They are not just going after BNY Mellon, however,
In 2009, then-California Attorney General Jerry Brown joined whistleblowers in a pending currency-exchange lawsuit against State Street Corp., seeking $200 million in damages.
Brown — now governor — said the bank had committed "unconscionable fraud." "This is just the latest example of how clever financial traders violate laws and rip off the public trust,'' he said.
State Street denied wrongdoing, as does BNY Mellon.
'The Wild West'
Experts call the currency-exchange market "The Wild West,'' because it's lightly regulated and long has used questionable practices.
"You can lose your shirt and more,'' said James Economides, co-founder of Amaces, a London-based provider of custodian monitoring services. "I'm sure there are people shocked and surprised. But there are others who suspected this and said, 'I don't really want to turn over the stone because I don't want to find what lurks underneath.' ''
Edward Siedle, a former Securities and Exchange Commission lawyer who investigates pension abuses, said most pensions that give banks custody of their assets fail to properly manage the relationships or examine the compensation the banks get.
"They secretly profit in numerous ways that may be harmful to pension clients,'' Siedle said. Custodians have long offered artificially low custody fees, he said, "while they enjoy hidden profits from services like securities lending, money market fund cash 'sweeps' and currency exchange.''
Times researcher Natalie Watson and computer-assisted reporting specialist Connie Humburg contributed to this report.