Retirement fund officials say the change could cost millions of dollars.
Mandel is requiring the funds to drop Boston-based State Street Bank and Bank of New York Mellon and use either JP Morgan Chase or CitiBank as custodians for their global assets. The banks that handle domestic assets will continue to be Huntington and Fifth Third.
“While OPERS has always tried to be very supportive of the treasurer’s role, we must continue to point out the risk associated with custody conversions,” OPERS Director Karen Carraher said in a March letter to Mandel’s chief financial officer. “These are expensive and introduce considerable risk to our system.
“This is our fourth custody conversion in 10 years.”
Three funds — Ohio Public Employees Retirement System, State Teachers Retirement System and Ohio Police & Fire Pension Fund – will see their annual costs more than triple to $4.76 million. The School Employees Retirement System expects to see its annual international custodian fees drop by $105,000. OPERS will change over in October and STRS will do so in December.
Preparing for the changeovers has taken the pension funds between six and 15 months as they fill out paperwork and navigate each country’s requirements.
When OPERS changes from State Street Bank to JP Morgan Chase beginning Oct. 1, it means four days of no trading on the international markets. OPERS must orchestrate a same-day change for more than 100 external money managers who must all follow the same instructions in countries from Argentina to Zambia.
Despite the costs and headaches, though, Mandel maintains that the switch is justifiable.
“Due to the FBI investigation into the Boyce Administration and State Street Bank, and lawsuits filed against these banks across the country, he felt obligated to move Ohioans’ money to different banks in order to protect Ohio taxpayers and retirees,” said Mandel spokesman Seth Unger.
Banks facing lawsuits
Since 2009, State Street Bank has faced lawsuits in Massachusetts, California, Washington and Arkansas and a Securities and Exchange Commission investigation over allegations the bank manipulated foreign currency transaction prices.
Since 2010, BNY Mellon has faced lawsuits and complaints in New York, California, Florida, Virginia, Massachusetts and Ohio over similar issues.
In 2010, Boyce, a Columbus Democrat, and his deputy treasurer, Amer Ahmad, assigned State Street Bank to handle international assets for three Ohio pension funds. State Street hired immigration attorney M. Noure Alo as its lobbyist. Alo was friends with Ahmad, and Alo’s wife worked as Ahmad’s secretary in the treasurer’s office.
At the end of Boyce’s administration in late 2010, the FBI opened an investigation into how the custodial contracts were awarded. Mandel’s administration has been cooperating with that investigation for more than two years.
Ahmad and Alo pleaded not guilty last month to federal felony charges that they participated in a kickback scheme in the treasurer’s office. The charges aren’t related to the custodial contracts.
In June 2011, Mandel asked Ohio Attorney General Mike DeWine to investigate whether State Street Bank and BNY Mellon cheated Ohio pension funds or taxpayers when conducting foreign currency transactions.
DeWine filed a lawsuit against BNY Mellon in March 2012, seeking $16 million in damages for OP&F and SERS. Although DeWine investigated whether to sue State Street Bank as well, no suit was filed.
Carraher said in an exchange with Mandel’s staff that JP Morgan Chase suffered a $2 billion trading loss in May 2012 and OPERS staff noted that JP Morgan Chase has been sued and investigated by a variety of government entities. OPERS is currently a plaintiff in a class action suit against JP Morgan Chase.
Unger responded that State Street and BNY Mellon were sued specifically over fraud relating to pension funds while the banks picked by Mandel “have not been sued for this type of fraud.”
When Mandel moved to re-bid the custodial bank contracts, State Street Bank was willing to drop its fees significantly to keep Ohio’s business. It proposed charging just $274,700 a year to handle the international assets for OPERS, STRS and OP&F – a steep drop from the $1.42 million a year it had been charging.
The Mandel administration didn’t consider it a qualified bid.
“State Street Bank disqualified itself from handling Ohio tax dollars by defrauding retirees across the country and hiring a crooked lobbyist through a crooked process to secure business from the Boyce Administration,” Unger said. “This lobbyist and Boyce’s deputy treasurer have since been indicted on bribery, conspiracy and fraud charges, and anyone who cares about protecting Ohio taxpayers would consider this information and remove State Street Bank from handling Ohioans’ money.”
Mandel, OPERS at odds
Mandel’s staff and OPERS officials have exchanged testy letters over transition issues. OPERS wanted to delay the switch by six months; Mandel’s office said no and accused OPERS of foot-dragging so the pension system could stay with State Street Bank, which has been sued by multiple government entities.
“Prolonging the custody relationship with this bank is irresponsible and unsafe for Ohio taxpayers and OPERS retirees, and is unacceptable,” wrote Seth Metcalf, Mandel’s general counsel and deputy treasurer, to OPERS’ Carraher.
Forcing a transition before everything is ready could put OPERS assets at risk, Carraher said.
“We do expect an adequate level of service from JPMorgan in resolving these issues, especially given the additional $2 million per year in custody fees,” she wrote to Metcalf.
Metcalf said on Thursday that the final issues have been ironed out between the bank and the fund. “We look forward to a safe and smooth transition of the assets on Oct. 1,” he said.
For more than 90 years, state law has assigned the authority to pick the custodial and depository banks to the state treasurer. But three separate auditing firms in four different reviews since 2006 have recommended that the statute be changed to authorize the pension funds to make the picks.
Funston Advisory Services, LLC, in an audit released in May, said the state treasurer’s role increases the costs and makes it more complicated.
Over the years, Ohio’s five public pension systems have grown to serve 1.8 million Ohioans and hold roughly $165 billion in net assets, including $41 billion in international investments.
Not only does state law give the treasurer the right to pick but it also requires him to use an Ohio-based bank. None of Ohio’s banks has the global reach required to handle all the international assets that the pension funds now hold. So, the treasurer picks a domestic custodian and an international custodian. And the pension funds hire other banks to provide master record-keeping services, accounting and other services.
It is not only convoluted, it’s unusual.
Funston reported that nine of 13 peer funds to SERS have a single custodial bank and two of the four that don’t are Ohio funds.
“The current SERS structure seems cumbersome and requires additional vendors, record-keeping and reconciliation processes,” the auditors reported. “This structure likely contributes to SERS’ relatively high custody costs.”
Campaign contributions
The bipartisan Ohio Retirement Study Council has long recommended that legislators give the authority to the pension funds to pick the custodians. But despite that, lawmakers opted not to take on that battle and excluded it from the sweeping pension reform bills passed last year.
The state treasurer has long benefited from campaign contributions from bankers and brokers who want to do business with Ohio. Mandel is no exception. Since 2009, his state campaign committee has received $477,200 from the financial services and banking industry, according to Ohio campaign finance records. His federal campaign committees received roughly $321,000 during the same period from the financial services and banking industry, according to Federal Elections Commission records.
Unger said campaign contributions have no influence over decisions on state contracts and Mandel isn’t willing to give up the authority to pick the banks.
“It is deeply concerning that even with the knowledge that State Street Bank defrauded pension funds across the country, and the fact that its lobbyist has been indicted for bribery, conspiracy and fraud, Ohio pension funds would still want to keep Ohio taxpayer money with State Street Bank,” Unger said.
“This poor judgment by the pension funds makes it crystal clear why it is vitally important for an elected representative, accountable to Ohio citizens, to be the watchdog of taxpayers’ and retirees’ hard-earned money.”
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