Banks overcharged major investment firms for currency trades, according to a Wall Street Journal article by Gregory Zuckerman, Carrick Mollenkamp and Lingling Wei, titled “Suspicion of Forex Gouging Spreads. The article cites bank insiders and the apparent broadening scope of alleged abuses in the $4 trillion foreign-exchange market.
One of the affected firms, BlackRock Inc., the world’s largest fund manager, launched an internal investigation last year after becoming concerned at the rates it and its clients were charged for some currency trades by custody banks including Bank of New York Mellon Corp., according to the article. The investigation led to a change of policy: BlackRock began doing its own currency trading or required evidence from custody banks that it is receiving prevailing market rates.
The article further reports that clients of Fidelity Investments Inc. were also overcharged by banks for some currency trades, again citing bank insiders.
Other than speculation, the reason for currency trading is that global investors that hold U. S. dollars must convert those dollars into the currencies of the countries where they invest. Institutions known as custody banks facilitate the conversion.
These custody banks, however, are not required to provide transaction-time records. This makes it difficult for clients to know exactly when a currency exchange took place, and to verify that the price they received was the then-prevailing price.
Attorneys general in three states have filed or are joining lawsuits alleging that custody banks improperly pocketed the difference between their cost of currencies and their clients’ cost. The three states are California, Virginia and Florida. The banks being sued are State Street Corp. and Bank of New York Mellon.
The suits were initiated by several current and former bank employees who blew the whistle on their banks. Whistleblowers stand to receive a percentage of any money the states recover.
A core issue appears to involve the banks’ “standing instruction service.” According to the article, Bank of New York said clients who do their own trading (and invest in their own Forex-trading infrastructure) can negotiate price, but others who prefer to use “our standing instruction service?to outsource FX trading,” are subject to different pricing protocols. “We offer various options to choose depending on a client’s objectives, capabilities and the size of their trades,” Bank of New York was quoted as saying.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in commodities and securities related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.