California Attorney General Sues State Street

California's attorney general has filed suit against State Street, alleging that the bank committed "unconscionable fraud" by illegally overcharging the state's pension funds when executing foreign-currency trades.
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SACRAMENTO, Calif. (TheStreet) -- California's attorney general has filed suit against State Street (SST) , alleging that the bank committed "unconscionable fraud" by illegally overcharging the state's pension funds when executing foreign-currency trades.

In a rather colloquial use of phrasing, California's attorney general, Edmund G. "Jerry" Brown, said in a statement, "This is just the latest example of how clever financial traders violate laws and rip off the public trust."

The state is seeking to recover $200 million from the Boston bank. California says State Street began taking illegal fees and surcharges in 2001.

Unsealed Tuesday in Sacramento Superior Court, the suit is based on evidence provided by whistleblowers, who claim that State Street "added a secret and substantial mark-up to the price of interbank foreign currency trades" when dealing on behalf of California's two huge pension funds, the California Public Employees' Retirement System, better known as CalPERS, and the California State Teachers' Retirement System, or CalSTRS.

Under the California False Claims Act, which is similar to the federal version, private citizens acting as whistleblowers can receive a percentage of the awards recovered by plaintiffs in successful lawsuits.

Brown, the former California governor and erstwhile Democratic presidential candidate, began an independent investigation into State Street's dealings after a whistleblower group calling itself Associates Against FX Insider Trading filed its own suit against the bank in 2008.

A State Street spokesperson told the wire services, "We categorically deny any allegations of wrongdoing and will defend ourselves against any litigation."

Also on Tuesday, State Street issued third-quarter earnings that met Wall Street expectations, but warned that the second half of its fiscal year could prove rough going.

The reason for the weakness? The bank said it has been collecting fewer transaction fees.

-- Written by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.