SACRAMENTO — A Boston bank cheated California's two largest employee pension funds of nearly $57 million by inflating fees it charged for foreign currency trades, according to a suit filed Tuesday by the state attorney general's office.
The pension funds, including the giant California Public Employees' Retirement System, didn't even know they were being fleeced by State Street Corp., the state's lawyers said. The scheme was uncovered by whistle-blowers with firsthand knowledge of how State Street operated, they said.
The accusations mark another hit to CalPERS. Investment losses have wiped out nearly a fifth of what once was a $248-billion portfolio. The fund also is investigating about $50 million in fees paid to a placement firm, headed by former board member Alfred Villalobos, that directed hundreds of millions of CalPERS dollars into private investor funds.
CalPERS officials were outraged that State Street, their primary banker for the last 17 years, allegedly ripped off retirement money owed to the fund's 1.6 million members, including state, county and municipal employees.
"We don't tolerate fraud; we don't tolerate abuse," said CalPERS spokeswoman Pat Macht. "Our members are happy to know when we are actively engaged in bringing back every penny that we believe could be wrongfully denied."
Sherry Reser, spokeswoman for the other fund, the California State Teachers' Retirement System, declined to comment on the lawsuit, other than to say that it "raises serious allegations."
State Street, which is running out of reserves to cover numerous legal actions it faces, said it would vigorously fight California's accusations. "We categorically deny any allegations of wrongdoing and will defend ourselves against any litigation," spokeswoman Carolyn Cichon said.
The whistle-blowers, who are not identified beyond a partnership they formed, disclosed the issue last year in sealed court documents. The attorney general's office initiated an investigation.
According to the lawsuit, State Street "raided" the two state pension funds by fraudulently pricing foreign currency trades State Street executed for them. The fraud occurred whenever CalPERS and CalSTRS needed foreign currency to close foreign securities trades or when the funds had foreign currency they wanted to convert back into dollars.
