Madoff Whistleblower Strikes Again; State Street to Pay Hefty Settlement

State Street Bank and Trust Company was slapped with a $530 million settlement because it was found to be cheating a number of government bodies on the basis of wrongly pricing their foreign exchange deals. The company faced charges from the US Securities and Exchange Commission, the Department of Justice, and also the Department of Labor thanks to suits initiated by Madoff whistleblower and finance market vigilante Harry Markopolos.

State Street was accused of conducting a sustained campaign of misleading its custody clients over the pricing of their trades. It was also accused of inflating the prices with hidden mark-ups. A lot of the information against State Street was provided by Madoff nemesis Markopolos’ Associates Against FX Insider Trading. The illegal activities are understood to have taken place between 1998 and 2009.

The three government departments issued a joint statement regarding the development. They said that State Street payout would be divided amongst a number of bodies. The Department of Justice would get $155 million, the Securities and Exchange Commission $167.4 million, and $60 million to a number of pension plan clients. The bank would also pay $147.6 million as settlement of private class action lawsuits brought by a number of its customers.
Interestingly, neither Markopolos nor Associates Against FX Insider Trading are named anywhere in the announcements regarding the State Street settlement. However, he has previously indicated that he was involved in the investigations.

Associates Against FX Insider Trading has been very busy tackling many instances of institutional financial irregularity. They recently settled big cases in November, getting settlements for the California State Teachers’ Retirement System and the California Public Employees’ Retirement System. The group has also made use of the False Claims Act whistleblower statutes in a number of states including Washington, Virginia, New York, and Florida to file more cases and eventually settle them.

State Street was in the business of looking after securities on behalf of clients while also enabling foreign currency exchange trading in certain instances were payments had to be made to issuers of foreign bonds. These transactions generally involved principal and interest payments. The company admitted to making changes to the interbank rate when conducting foreign exchange transactions on behalf of its custody clients. In fact, while the company assured its clients that they would be given the best possible rates its sole focus was to drive up its profits.

It would be very difficult for companies today to conduct a scam such as done by State Street. The foreign exchange market is now run electronically and information is available easily and accurately. Institutional and individual traders can get the information they need without any effort so that they can conduct the best possible trades.
Markopolos and his associates have another case pending against the Bank of New York Mellon Corp for irregularities in foreign exchange transactions. Markopolos’ book about the sordid Madoff story, No One Would Listen: A True Financial Thriller, would definitely give an insight into this giant-killer’s mind and motivations.

About Harry Markopolos

A whistleblower in the infamous Ponzi scheme of Bernard L. Madoff Investment Securities LLC, Harry Markopolos is a former securities industry executive. At the moment he is an independent financial fraud and forensic accounting investigator.

Interestingly, in 2000, 2001 and 2005 Markopolos had contacted the U.S. Securities and Exchange Commission (SEC) and alerted them about the fraud. He even had evidence in the form of a massive pile of documents. But each time they ignored him or didn’t really pay attention to his evidence by only conducting a cursory investigation.

Eventually the fraud was uncovered in 2008 and Madoff was sentenced to 150 years in prison in 2009!