STT State Street Corporation

By Aruna Viswanatha 

State Street Corp. is nearing a deal to pay more than $500 million to end long-running investigations from federal authorities and others into allegations that the custody bank unlawfully overcharged clients on foreign currency transactions, according to people familiar with the matter.

The settlement, which could be announced this summer, is expected to resolve claims from the U.S. Justice and Labor departments and the Securities and Exchange Commission, as well as lawsuits from clients including pension funds, these people said.

The lawsuits accuse State Street of promising to execute foreign exchange trades for clients at market prices, but instead using inaccurate or fake rates that included hidden markups. The alleged overcharges occurred between 1998 and 2009, according to the lawsuits.

Earlier this month, State Street said in a securities filing it had set aside $565 million to resolve related claims. But the deal has been held up as the Justice Department and the bank work on a statement of facts that the bank will admit to, people familiar with the talks said.

In June 2015, the bank disclosed it set aside $585 million to cover all of the claims. In November, it quietly entered into a related $13 million settlement with the California Attorney General's office, according to a copy of the agreement.

State Street said in a statement that "settlement agreements have not been finalized," but it believes that the money it has set aside will resolve the claims and investigations. "Matters of this nature can drain both time and resources; so where possible and appropriate we feel it is in State Street's and our clients' best interests to pursue settlements, " the bank said.

In a May 6 filing and in the statement Monday, State Street said that "although we believe this recorded legal accrual will address the financial demands associated with these claims, significant nonfinancial terms remain outstanding." Those terms include the admissions, the people said.

Last year, the world's largest custody bank, Bank of New York Mellon, paid $714 million to resolve similar allegations from federal and state authorities and clients.

As in the BNY case, the Justice Department is expected to bring civil fraud claims against State Street under the Financial Institutions Reform, Recovery, and Enforcement Act, the people said.

The private cases had been put on hold in January 2015 as the bank sought to reach a settlement with the plaintiffs and regulators.

The allegations first came to light when the California attorney general's office joined a whistleblower lawsuit in 2009 that accused State Street of defrauding California pension funds Calpers and CalSTERS through overcharging on currency trades, despite being obligated to charge the rate at the time of the trade. Under the November settlement, the California funds kept State Street as their custodian and renegotiated some existing contracts. State Street denied it had made any misrepresentations about its foreign exchange transactions or violated California law.

Behind BNY Mellon, State Street is the second largest custodian bank, safeguarding about $27 trillion in assets for money managers, companies and other clients, and performing administrative functions on behalf of other banks and corporations. It is also an investment manager, with $2.3 trillion in assets under management.

The investigations have been conducted by the U.S. attorney's office in Boston as well as the Boston regional offices of the Department of Labor and the Securities and Exchange Commission.

The Labor Department is involved because many of the allegedly defrauded clients include retirement plans.

The Labor Department didn't respond to a request for comment. The U.S. attorney's office and the SEC declined to comment.

The issue involves so-called standing instruction, foreign exchange programs under which customers who require frequent currency transactions don't negotiate each trade but rely on the bank to execute them on their behalf.

State Street has faced a series of cases in recent months that involved overbilling allegations. Last month, federal prosecutors charged two former senior executives of the bank with secretly adding commissions on billions of dollars in securities trades, including for Irish and British pension funds and a Middle Eastern sovereign-wealth fund.

Also in April, Massachusetts state regulators accused State Street of overbilling clients for 18 years by including concealed markups on services billed as out-of-pocket expenses. In one example the regulator cited, State Street allegedly charged 20 times more than it cost the bank to process messages through the Society for Worldwide Interbank Financial Telecommunication or Swift, the international interbank messaging system.

"We charge our clients $5.00 per message -- an exorbitant mark up that will certainly piss off clients when they figure this out," one employee wrote in a document emailed in 2009, according to the administrative complaint filed by Massachusetts Secretary of State William Galvin.

Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com

(END) Dow Jones Newswires

May 16, 2016 11:51 ET (15:51 GMT)

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