More On Legal & Compliancefrom The Advisor's Professional Library
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
State attorneys general in California, Virginia, Tennessee and Florida broadened their investigations into whistleblower allegations that public pension funds in the U.S. were overcharged for currency conversion by tens of millions of dollars.
The foreign exchanges took place in connection with securities trading for those funds. At the same time, efforts were proceeding on a lawsuit filed by an entity called FX-Analytics against Bank of New York Mellon Corp.
Reuters reported that, in an article in The Wall Street Journal, FX-Analytics’ $150 million lawsuit was taken over by Virginia state prosecutors in January. It was filed in 2009 in Fairfax County Circuit Court in Virginia, alleging that the bank overcharged a state pension fund in currency conversions it made for securities trading.
Another lawsuit brought against Boston-based State Street Corp. in California was filed by an entity called Associates Against FX Insider Trading. That lawsuit alleged the raiding of custodial accounts of California’s two largest public pension funds by State Street, to the tune of more than $56 million, via foreign currency trades that were fraudulently priced.
In 2008 and 2009, the California state attorney general sued State Street.
The whistleblowers are retaining anonymity by using Delaware shell companies, according to The Journal’s report. It added that they might have worked at the two banks, and identified one whistleblower as a Boston-based investor named Harry Markopolos. Markopolos had pointed regulators toward Bernard Madoff, but they failed to take any action till Madoff’s firm collapsed.
In a Huffington Post report, Markopolos was quoted as saying FX fraud would be the next big scandal, adding that the way the fraud works is for banks handling foreign currency transactions for public employee pension funds indicate that buys are made at the previous day’s highs and sells at the lows: “So they're giving you a false train ticket and taking 1 to 1 1/2 percent a trade ... that's a direct loss to the states, and it’s also a direct loss to the private party pension funds and not only that but the international pension funds of other nations so this is global.”
Markopolos went on to say, “The banks that are doing it, it's 25-33% of their bottom line net income per year, so it's like being addicted to heroin, they can't afford to pull the needle out because their share prices will collapse. It's also a case of false financial statement reporting—when a quarter to a third of your net income is fraud-based, and you're not telling shareholders that, then you have a Sarbanes-Oxley issue.”