If the allegations of a whistle-blower lawsuit prove true, a bank trusted with doing international trades on behalf of Florida's public pension fund fraudulently skimmed money when it exchanged currency. Attorney General Pam Bondi deserves credit for moving quickly, unlike her predecessor, to have the state take over the suit originally filed in Tallahassee in November 2009 in connection with transactions New York Mellon bank made for the State Board of Administration. But the suit should also raise fundamental questions for Bondi, Gov. Rick Scott and Chief Financial Officer Jeff Atwater — the SBA's trustees — about the oversight and judgment of SBA managers in managing $150 billion in assets.
Florida would be one of a number of states alleging that their custodial banks perpetuated fraud in foreign currency exchanges. The suits allege that when the banks made international trades, they charged the highest currency conversion prices of the day, not the actual price the banks paid. The difference went to the banks and wasn't disclosed. Similarly, when the banks exited the trades, the sales were made at a better rate than what the states' received.
The allegations are denied by a Mellon spokesman, and the Florida case is still under seal. But reportedly Harry Markopolos, the investor who tried to alert regulators to Bernard Madoff's Ponzi scheme, is helping to lead the whistle-blower effort. The Wall Street Journal reports that he worked with bank insiders to investigate currency-exchange practices and gather data.
While the banks allegedly went out of their way to hide their activities, the SBA staff should have been able to evaluate whether the currency exchange rates the state was charged were suspiciously nearly always that day's high rate. Certainly after the lawsuit was filed there should have been a wholesale review immediately ordered.
Mellon's practices had been a cause for concern before. An internal SBA audit in August 2009 raised questions about how the bank valued billions of dollars in securities. Overvaluing assets can boost management fees while hiding fund losses. But it looks like oversight wasn't sufficiently tightened.
Now the question for Bondi, Atwater and particularly Scott — who made such an issue of SBA losses on the campaign trail — is what they will do to ensure that all of SBA's vendors, including banks, private money managers and external consultants, are not skimming from pension funds or other public assets. Scott wants public employees to start contributing 5 percent of their salaries for pension costs to save taxpayer dollars. But as he calls for employees to pay, he also needs to make the SBA more accountable to ensure both employees' and taxpayers' contributions aren't just flowing into the pockets of private vendors.