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States ramp up foreign currency trade probes

By Martha Graybow and Tom Hals

NEW YORK/WILMINGTON, Delaware (Reuters) - U.S. states are stepping up probes into whether banks overcharged public pension funds millions of dollars in converting currencies for securities trades, a lucrative area of banking.

Officials in Florida, Virginia and California are examining foreign-exchange fees paid by state retirement systems, and they are getting help from would-be whistle-blowers who have filed private lawsuits against Bank of New York Mellon Corp and State Street Corp.

Florida Attorney General Pam Bondi on Thursday filed a state court notice of intervention in a case involving Bank of New York Mellon, according to a court filing.

"The AG's office is investigating this practice," spokeswoman Jennifer Krell Davis for Pam Bondi said in an email. The notice formally said the attorney general's office would take over the case.

Lawsuits against Bank of New York Mellon in Florida and Virginia were spurred by financial investigator Harry Markopolos, best known for trying to warn regulators that Bernard Madoff was running a fraud, according to a person familiar with the matter. The person declined to comment because the litigation is still pending.

News of the widening scrutiny helped push down shares of both Bank of New York Mellon and rival State Street on Thursday.

It's not unusual "for firms to take liberties with the exchange rate when dealing with pensions and similar funds that are diversifying their portfolios into international stock and bonds," said Greg Salvaggio, vice president of trading at currency consulting firm Tempus Consulting in Washington.

Foreign exchange traditionally has been a rich source of revenue for U.S. banks, particularly custodial banks, which not only profit from buying international stocks and bonds for pension funds and other investors but also on trading dollars into other currencies as needed. Foreign exchange overall is a huge business, with average daily volume of $4 trillion.

States are examining whether banks charged pension plans false exchange rates for foreign currency trades rather than the actual rates. Getting the state or federal government to step in to lead lawsuits initiated by would-be whistle-blowers is key to such cases moving forward. Whistle-blowers can share

in any potential settlement or other payments that companies may make.

The Florida lawsuit and a similar case in Virginia were brought by an entity called FX Analytics, which has ties to Markopolos, the Boston-based investigator whose warnings to regulators on Madoff went unheeded for years.

The Virginia case, which recently was unsealed, seeks $150 million in damages from Bank of New York Mellon. Last month, Virginia Attorney General Kenneth Cuccinelli intervened in the case, his spokesman said on Thursday.

Bank of New York Mellon said on Thursday that the Virginia lawsuit "is without merit" and it will fight it.

California announced a case against State Street in 2009 that sought $200 million for committing an "unconscionable fraud" against the state's biggest pension funds.

State Street spokeswoman Carolyn Cichon said the bank's "FX services are consistent with our contractual obligations with the California state entities and we are defending ourselves against the charges made in the complaint."

There may be more of these cases that are currently under seal, said the source familiar with the matter. There is interest in bringing other cases although pension funds are cautious about upsetting relations with banks, this person said.

The same whistleblower in the California litigation, FX Insider Trading, also sued State Street in a New York state court, according to legal database Westlaw, part of Thomson Reuters. That New York case was filed in April 2008, about a week after FX launched its California lawsuit.

While the state of California decided to join the State Street case, the New York attorney general's office does not appear to have done the same. An order to extend time to intervene was entered in the New York case last fall, Westlaw shows, and the matter is still under seal.

The New York attorney general's office had no immediate comment. State Street declined to comment.

Bank of New York Mellon shares were down 1.4 percent at $31.38 in afternoon trading, while State Street was down 1.5 percent at $46.54, both on the New York Stock Exchange.

(Additional reporting by Michael Connor in Miami, Dan Levine in San Francisco, Svea Herbst-Bayliss and Ross Kerber in Boston and Gertrude Chavez and Chris Sanders in New York; editing by Gerald E. McCormick)

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