Harry Markopolos has done it again. Only this time, the world is listening. Mr. Markopolos, a Boston-based investor, tried repeatedly and for years to warn the SEC and financial world of Bernie Madoff’s fraud. He is now being reported as a central figure behind the filing of two whistleblower suits in California and Virginia. The banks (Bank of New York Mellon and State Street Bank) were responsible for managing state pension funds. The suits allege that the banks fraudulently charged the pension accounts the highest price available on the trading day rather than the actual price of the trade.
Translation: the banks overcharged state pension funds, effectively taking money from the hands of retired state employees. Shameless conduct indeed.
The lawsuits in California and Virginia were initiated by anonymous whistleblowers working through Delaware shell companies believed to be connected to Mr. Markopolos. The companies filed suit on behalf of the state. And, in a sign the cases are being taken seriously, the Virginia Attorney General, Kenneth Cuccinelli, has intervened. Whistleblowers may receive between 15% and 30% of any government recovery. Considering the Virginia suit alone seeks $150 million in damage, that’s not a bad chunk of change.
What actually happened?
When a bank buys stock on a foreign exchange, it must first convert dollars to the currency of that country. For example, stocks in Japan must be bought with yen. When buying or selling foreign currency, there is always a difference in the “ask” price and the “bid” price. Essentially, a bank can’t buy and sell dollars at the same price. This means that there is a built-in fee to exchanging currencies and this fee changes throughout the day as the markets fluctuate. What New York Bank Mellon and State Street Bank have done (allegedly) is make trades at their own convenience without regard for the cost of currency exchange. Then, at the end of the day, when it’s time to bill their clients (the state pension funds of Virginia and California), the banks bill at the day’s highest rate – often higher than what the bank actually paid.
Three cheers for Harry Markopolos and his whistleblowers.
As mentioned, Mr. Markopolos is a Boston based investor whose warnings of the Madoff fraud fell on deaf ears. Three cheers to Mr. Markopolos for continuing the fight for honesty on Wall Street. Thanks to tips by employees of these banks and others familiar with the situation, Mr. Markopolos was able to put information to action and hopefully is on the path to right yet another wrong on Wall Street
The states deserve praise as well. Whistleblower provisions are essential to monitoring fraud in our financial system. This case is a perfect example. Whistleblower provisions offer incentives for informed citizens to come forward. Without these provisions it is likely that the states of California and Virginia would still find themselves in the dark concerning this fraud while Wall Street bankers quietly sweep millions from public pension funds into their own back pockets.
Assisted by Zachary Kady