State Street forex settlement is notch in belt for Madoff whistleblower

The U.S. government finally heard Madoff whistleblower Harry Markopolos loud and clear.
Markopolos, and his whistle-blower group Associates Against FX Insider Trading, were key players in a $530 million settlement announced Wednesday against State Street Bank and Trust Company for allegedly cheating several government bodies on the pricing of their foreign exchange transactions. Markopolos declined to comment.
In a joint announcement on Wednesday the DOJ, SEC, and DOL said that State StreetSTT, +2.67%   will pay $382.4 million, including $155 million to the Department of Justice, $167.4 million to the SEC and at least $60 million to pension plan clients to settle allegations that it deceived some securities custody clients on when it priced foreign currency exchange transactions. The alleged misconduct took place from 1998 to 2009.
The bank also agreed to pay $147.6 million to settle private class action lawsuits filed by bank customers alleging similar misconduct, the Justice Department said.
Markopolos’ group filed its largest forex case originally in California, on behalf of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System. That suit was settled last November. Additional cases filed via False Claims Act whistleblower statutes in Virginia, Florida, New York State and Washington state have also already settled. Markopolos and his group have already been paid for their whistleblower efforts based on those settlements.
The payouts conclude almost all of the investigations State Street has faced since 2009, when Markopolos filed the California lawsuit. Associates Against FX Insider Trading and Markopolos are not named in the latest State Street settlement announcements, but Markopolos has previously acknowledged his involvement in the case.
State Street safeguards clients’ securities as part of its custody business and offers indirect foreign currency exchange trading when clients buy and sell foreign currencies as needed to settle transactions, such as interest and principal payments from foreign bond issuers.
State Street admitted in its settlement with the DOJ that it generally did not price FX transactions at prevailing interbank market rates, contrary to what it told certain custody clients. State Street admitted that FX transactions were marked-up or marked-down from the prevailing interbank rate.
State Street allegedly misrepresented to custody clients that it provided “best execution” on FX transactions, that it guaranteed the most competitive rates available on FX transactions and that it priced FX transactions based on a variety of factors. Instead prices were largely driven by hidden mark-ups that maximized State Street’s profits.
Markopolos has also filed a whistleblower claim in the SEC case. It may be at least two more years before that payout occurs based on similar cases.
A State Street Bank spokeswoman said that the negotiated settlement agreements are expected to resolve, subject to the courts’ final approval, the pending litigation and regulatory matters in the United States related to its indirect foreign exchange business.
“Each agreement depends upon certification, for settlement purposes, of a class of State Street’s custody customers that executed indirect foreign exchange transactions with State Street between 1998 and 2009, and final approval by the United States District Court for the District of Massachusetts of the settlement agreement between State Street and the class,” she said. “Matters of this nature can drain both time and resources; so where possible and appropriate we feel it is in our and our clients’ best interests to pursue settlements. Our previously established reserve will be sufficient to cover all costs associated with these agreements.”
Since the lawsuits were filed the foreign exchange markets have gone from an opaque, manual quote market to a fully electronic market where real-time quotes and historical information is available to institutional and retail customers. Every major bank that acts as a forex dealer has its own quoting and execution platform and multi-dealer platforms have sprung up that offer competitive quoting on worldwide currencies.
Checking on rates in advance or verifying after the fact was very difficult to do in the past. Calling around for competitive rates opened a customer up to potential front-running of the trade by other dealers.
He and other whistle-blowers filed a similar case against Bank of New York Mellon Corp. BK, -0.25%   in Massachusetts. A lawsuit filed on behalf of the New York City pension funds by New York Attorney General Eric Schneiderman in 2011 against Bank of New York Mellon Corp for allegedly shortchanging the funds in foreign currency exchange transactions is still pending.
The New York City BONY Mellon suit is the last open forex case for the Markopolos group.
The SEC has already fined Bank of New York Mellon $30 million in June for misleading certain of its custodial clients about pricing when executing standing instructions for foreign currency transactions.
Markopolos spent years on Bernie Madoff’s trail and tried to warn regulators about the fraud, but he was largely ignored. It’s a frustrating experience he documented in his book, No One Would Listen: A True Financial Thriller.

What If Brexit Doesn’t Happen?


  • There's an unlikely, but possible scenario in Britain, where politicians would not enact article 50.
  • If Britain doesn't Brexit - what would happen? A GBP reversal?
  • Confusion exists about where politicians stand on this issue.
Something not talked about in the mainstream financial news - the nuances of Brexit. The markets seem to think that Brexit is a 'done deal' - the people voted, and that's it. But what if Brexit didn't happen?

EES: The Forex Monopoly

Forex is a Monopoly, controlled by a small 'cartel' of big banks.  That's changing, and changing fast - as a number of non-bank FX participants are replacing the traditional 'big 12.'  As we explain in Splitting Pennies - the fact remains, if a small group of companies controlled and manipulated the price of any other market, they'd be shut down faster than you can say "Anti-Trust."  
A short list of things that are unique about FX:
  • No "Insider Trading" rules.  Yes, that's right!  No insider trading rules.  Don't believe it, confirm it.
  • Trades 24/5 - no 'market times'
  • People need FX - businesses need currency to operate (People don't need stocks)
  • FX is an openly manipulated market (but, each central bank can only manipulate its own currency)
The most important thing stock traders need to understand about Forex
There's a phenomenon in FX we can call ultra high latency information arbitrage.
During Brexit, it took the GBP/USD hours to go down, in total more than 20 hours from peak to valley.  If you missed the first move down, it was easy to catch the 2nd, or the 3rd, or the 4th.  Brexit is the most bright, obvious example but not the only one - it happens nearly every week. 
Coup in Turkey?  Risk on.  Failed coup?  Risk off.
In the stock market, when there's news, not a moment goes by that the market absorbs it.  In fact, the information knee-jerk in stocks is so quick and usually so severe, traders have strategies designed to buy into the panic information leak selling.
It's not possible to trade on information in stocks because it happens so quickly, even if you use algorithms and subscribe to Reuters 'ultra low latency' data service, there's almost no opportunity there.  But in FX, it can take the markets tens of hours to absorb PUBLIC information.  No one had 'insider' knowledge about Brexit.  GBP/USD went down slowly, very slowly, over a period of many hours.  Spreads widened, but not to levels that would impact trading. 
But with FX, there's good news.  You don't need to own the FX Monopoly, to generate some Monopoly money.  But in FX, you can take your profits and spend it in your local shop (Children, don't try to spend Monopoly money, it's illegal).  FX - it's like the Monopoly for adults!
If you want to get started looking at investing, checkout Fortress Capital Forex

EES: What investors need to know about USAs FOREX rules

US lawmakers dropped a nuclear bomb on the Forex industry called "Dodd-Frank" which implemented a series of rules and regulations that killed all life in the budding Forex industry, in USA.  We explain this is detail in Splitting Pennies - Understanding Forex; the rules are widely misunderstood, and widely catastrophic for trading Forex.  You can read more about this massive legislation here, in summary. 
A summary of the rules, that impact Forex traders:
  • 50:1 leverage, no cross netting (meaning, if you are long EUR/USD and long USD/CHF, it eats into margin calculation twice, even though you're nearly flat in the USD)
  • No hedging (cannot BUY and SELL same pair in the same account)
  • FIFO (First in, First out - this means you must EXIT each position in the same order in which you ENTERED, per pair).
A summary of the rules, as they impacted Forex brokers who offer access to the Forex markets:
  • Increased and more strict netcap rules, meaning that in reality, you need $50 Million or more in free cash sitting in an account, with no liabilities (wait a minute - sounds like a public company should be in violation?? ahem)
  • Increased fees to NFA, both in fixed fees and per trade transaction fees for use of FORTRESS system (which were happily passed on to the client)
  • More regulatory costs and complexities, meaning that a large investment was needed in dealing with new rules, not only in money but increased operational complexity
A summary of the impact this had on traders:
  • Mostly, traders stopped trading Forex, as these rules made it even harder to make money in an already difficult market
  • Traders went overseas.  Those who could afford, established residency or corporations in foreign countries, in order to continue trading Forex at reasonable venues (which, in parallel, were developing new cutting edge market making technologies) in the UK, Australia, and others.
A summary of the impact this had on brokers:
  • Forex brokers mostly closed their US operations.  Some closed completely, selling their operations to the remaining players.  Others, decided to go overseas (and remain living in USA).
  • The remaining brokers, colluded in solidifying their monopoly on the US Forex market
But, the new Forex rules did not accomplish what they supposedly set out to do:
  • The hedging rule doesn't prevent CTA accounting fraud, and it doesn't save the customer money, if anything it increases costs to the customer, as those who really want to hedge are forced to go overseas or open 2 accounts and building a system to accomplish the same thing
  • PFG, MF Global were regulated firms.  PFG, had an aggressive compliance department that insisted on following rules above and beyond requirements.  Their compliance would check partner websites for potentially offensive content.  They supplied (see image below) 60 page Disclosure Documents as templates to CTAs, with over the top boilerplate and legalese:
A lot of help that was.
If you want to get started looking at investing, checkout Fortress Capital Forex

Everyone is a Forex investor

Globalintelhub (by JoeGelet), 2016

Whether you know it or not, everyone is a Forex investor.  As we explain in Splitting Pennies – Understanding Forex – just by going grocery shopping, you’re trading Forex.  If you use US Dollars, you are trading Forex.  If you have a savings account based in US Dollars, you are investing in Forex.

Brexit was a great example of FX being in focus, but there are many.  Every week there’s an FX event, whether it be a coup or failed coup in Turkey, an NFP surprise, or cheif traders being arrested at JFK airport.

ANY global event is an FX event, ANY market event is an FX event, but NOT ALL market events are FX events.  FX is the superset of markets.  Remember, stocks are settled in US Dollars.  That’s changing, with all the Bitcoin and blockchain proposals, but we’re still years if not decades away from signficiant paradigm shift in that regard.

Investors are starting to take note of FX.  Forex is becoming part of a mainstream discussion on Wall St., although behind the scenes.  This is happening in parallel with a restructuring of the market dyamics on a technical level.

Solid reasons that any portfolio should include FX strategies:

  • Mainstream investments show a diminishing return
  • The stock market can’t go up forever
  • FX provides opportunities not seen in other markets
  • Although there are risks, the risks have a different nature, and there are also more opportunities 

Although everyone is a Forex investor, the majority are always losing.  They are losing slowly through the rapid deterioration of the currency.  Many investors make up for this with high yield investments – but they are rare in a ZIRP and coming NIRP.

Forex provides a means to diversify this risk, for investment professionals, investors, quants, corporations, pension funds, and basically anyone – even for the retail investor who only has $1.  Yes, you can open an account with Oanda for only $1.  This is where we derived the name for our recent book “Splitting Pennies” – Currencies in normal markets don’t change too much.  Brexit was an exception.  So in order to profit from Currency trading, leverage is used, thus multiplying risks and profits too.  Forex trades are divided up so small, the smallest unit is called a “PIP” which is 1/10,000 th of a currency.

If you’re not already starting the move into Forex – don’t worry, it will happen with or without you.   If you want to give yourself a heads up, checkout Splitting Pennies – the pocket guide designed to instantly make you a Forex genius!

If you want to get started looking at investing, checkout Fortress Capital Forex

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