* Arkansas teacher pension fund sued State Street
* State Street fighting FX fraud charges on several fronts
* U.S. judge says courtroom battles "can't be great business"
By Tim McLaughlin
BOSTON, June 5 (Reuters) - State Street Corp will open settlement discussions soon with an Arkansas pension fund that accuses the custody bank of overcharging on currency trades.
Under an order from U.S. District Court Chief Judge Mark Wolf, the bank and the $9 billion Arkansas Teacher Retirement System have until July 13 to meet at least once to discuss the possibility of settling the civil fraud lawsuit.
One of State Street's most lucrative franchises - trading foreign currencies for pension funds - is under attack; the bank is fighting lawsuits filed by pension funds in several states.
The bank's forex business is also the subject of government investigations, including by the U.S. Department of Justice, the U.S. Department of Labor and the U.S. Securities and Exchange Commission, State Street has disclosed.
"State Street has so many guns trained on them. They're not going to be able to avoid a settlement," said Patrick Burns, director of communications for the Washington, D.C., nonprofit group Taxpayers Against Fraud, which works on lawsuits brought under the Federal False Claims Act. "These things are just building steam."
Judge Wolf set the deadline for settlement talks after handing State Street a legal setback in the case last month when he denied the bank's motion to dismiss the civil fraud claims. Both sides declined to comment on settlement talks.
During a court hearing last month, Wolf asked State Street's lawyers, from the law firm WilmerHale, whether the litigation might hurt the bank's business.
"Here you've got a customer who pays you $900,000 a year, and State Street probably pays WilmerHale more than that," Wolf said. "It can't be great business to be litigating big customers."
"No, it's not great business," answered attorney Jeffrey Rudman.
The legal disputes center on trades State Street made on behalf of pension funds that did not involve negotiating specific foreign exchange rates. On those so-called indirect trades, State Street is accused of concealing price markups that were several times higher than those on trades with negotiated rates.
The bank denies any wrongdoing. "State Street has always accurately disclosed the amount of currency exchanged in every foreign exchange transaction where St ate Street Global Markets is the counterparty, including every indirect FX transaction," State Street spokeswoman Alicia Curran said.
In the Arkansas teacher pension fund case, State Street is accused of marking up a small subset of non-negotiated trades up to 18 times higher than negotiated trades, according to court papers. The pension fund said it thought it was being charged a wholesale rate pegged to what big banks charge each other, known as the interbank rate.
"If State Street believed it was authorized to take the kind of compensation it took, it could have spelled it out clearly and we wouldn't be here today," Wolf said at a hearing last month.
Lawyers for State Street have argued in court papers that the bank acted no differently than the discount warehouse operator Costco Wholesale Corp. There was nothing fraudulent about failing to disclose to customers the precise difference between wholesale and retail prices; it was an ordinary business practice, the lawyers argued.
But David Goldsmith, a lawyer for the Arkansas pension fund, told Wolf that State Street told the fund back in 1998 that there would be "no charge" for currency trades.
And in the next five fee schedules, the bank was silent on the matter of forex trading costs. It wasn't until 2009, and after State Street was sued by California's attorney general, that the bank made clear it was trading against the interests of pension funds on non-negotiated trades, Goldsmith said.
He also said most of the Arkansas pension fund's indirect forex trading involved repatriating dividends paid by foreign corporations. For example, when Honda Motor Co Ltd. pays a dividend in yen, a custody bank will exchange that currency into U.S. dollars for a pension fund.
While State Street has not conceded any wrongdoing in any of the cases, it has offered customers more transparency on non-negotiated trades. Meanwhile, the pension funds have changed their own behavior by negotiating more trades, compressing State Street's profit margins on that activity.
In the first quarter, State Street reported that revenue from non-negotiated, or indirect, trades fell 13 percent from a year earlier to $75 million. And the proportion of total foreign exchange revenue from indirect trading declined to about 50 percent from about 54 percent.
State Street has acknowledged that some customers may continue to shift away from indirect trading. (Reporting By Tim McLaughlin; editing by John Wallace)