$300 Million Settlement for Pension Funds Overcharged on Foreign Currency Trades

For roughly a decade starting in 1999, State Street Bank ran a quiet scheme against the pension funds it was supposed to serve. The bank acted as custodian for public retirement systems and other institutional investors, handling the foreign currency transactions those clients needed whenever they bought or sold foreign securities. On every such trade, State Street reported exchange rates to clients that were quietly worse than the rates the bank actually obtained. The spread stayed with State Street as undisclosed profit. Clients, including the Arkansas Teacher Retirement System, had no way to know they were being systematically shortchanged.

In 2011, Lieff Cabraser Heimann and Bernstein and Labaton Sucharow LLP filed a class action complaint in the District of Massachusetts on behalf of the Arkansas Teacher Retirement System and a proposed nationwide class of similarly harmed institutional investors. Thornton Law Firm served as liaison counsel. The complaint alleged violations of fiduciary, contractual, and statutory duties, and for the ERISA plans among the class it raised additional claims under the Employee Retirement Income Security Act of 1974.

The litigation ran five years. After extensive discovery and mediation, the parties reached a settlement-in-principle. On November 2, 2016, Senior U.S. District Judge Mark L. Wolf granted final approval of a $300 million class settlement. ERISA plan clients stood to receive approximately $60 million of that total under the proposed distribution formula.

The case was not without controversy after settlement. Beginning in December 2016, the Boston Globe reported that the three plaintiff firms, Labaton Sucharow, Lieff Cabraser, and Thornton Law Firm, had submitted inflated fee declarations: temporary contract attorneys paid $25 to $55 per hour had been billed at rates above $350 per hour, and some hours were counted more than once across firms. A court-appointed special master investigated. The managing partner of Thornton Law Firm testified that he signed a fee declaration without fully reading it first, calling it a 'stupid mistake.' The district court ultimately cut the combined fee award from approximately $75 million to $60 million. The First Circuit affirmed a Rule 11 sanction against one of the co-counsel firms for separately misrepresenting an empirical study on fee awards.

The $300 million recovery itself was not disturbed. Separately, in July 2016 State Street agreed to a $382.4 million global settlement with government authorities over the same hidden FX markups charged to custodial clients, comprising $167.4 million in disgorgement and penalties to the Securities and Exchange Commission, a $155 million penalty to the Department of Justice, and at least $60 million to affected ERISA plan clients. Combined with the $300 million private class recovery, State Street paid roughly $680 million for its systematic FX overcharging of institutional custodial clients.