Whistleblowers To The Rescue - Again!

Today (February 3, 2011) The Wall Street Journal reports that the attorneys general in California and Virginia are investigating whether banks overcharged public pension funds by tens of millions of dollars for foreign-exchange transactions. Other states, including Florida and Tennessee, are also conducting investigations.

The states are looking into whether certain banks charged state pension funds the most expensive foreign-exchange price possible during the day when a trade took place, instead of the rate available at the time the trade took place. This also occurred when currencies were sold. Banks paid the state the lowest price possible for the day and not the rate available at the time of the trade.

The international foreign-exchange market is a $4 trillion-a-day exchange market.

U.S. investors trading in global stock markets must convert dollars into the currencies of the foreign countries in which they invest. For example, if an investor (pension fund) buys stock in a South Korean auto maker, it converts U.S. dollars to won, and reverses that exchange when selling the stock. Custodial banks facilitate this foreign exchange function.

The suits claim the banks didn't charge the pension funds the currency rates prevailing at the time of the trades, but consistently charged them the highest currency-conversion prices of the day, and kept the difference for their own account. The suits also say the banks similarly overcharged when the investors exited the trades.

Preliminary studies by university professors indicate custodial banks generally know the price they charge their clients and the bid-ask spread within a few hours of any transaction. Customers only learn later about the price they paid and never the bid-ask spread between what sellers are offering and buyers are willing to pay.

The California case was unsealed in 2009 and estimates the fraud at $56 million. The Virginia suit was unsealed last week and seeks $150 million in damages. Details of the matters indicate that some of the whistleblowers currently or previously worked at the defendant institutions.

About 30 states have statutes that allow whistleblowers to collect as much as 15% to 30% of any government recovery in cases in which they assist.

US States Widen Currency-Trade Probes, The Wall Street Journal, February 2, 2011