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Whistle-blower lawsuit alleges pension funds got cheated

But AG won’t join high-stakes case vs. State Street

A case filed by whistle-blowers on behalf of pension plans for Massachusetts cities and towns in a widening foreign-exchange inquiry alleges that State Street Corp. defrauded customers across the country of $400 million per year for a decade.

Harry Markopolos testified in Washington, D.C., about the Madoff Ponzi scheme in 2009. Jason Reed/Reuters/File/X00458

The lawsuit, filed with the help of fraud investigator Harry Markopolos in 2009 and later unsealed, purports to represent the interests of nearly 300 municipalities, including the City of Boston, plus the Massachusetts Turnpike Authority and the Massachusetts Water Resources Authority.

Markopolos and a whistle-blower group calling itself Associates Against FX Insider Trading brought the case on behalf of the government bodies. If they succeed, they are entitled to a portion of any damage award.

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Such whistle-blower cases typically begin with a confidential appeal to prosecutors to join the case - in this matter, Attorney General Martha Coakley. But Coakley decided not to pursue the case; by law, it later became public. The Globe has obtained a copy of the unsealed court record.

Boston-based State Street declined to comment specifically on the Massachusetts lawsuit. A company statement said: “We continue to vigorously defend the allegations regarding our indirect FX services made in the civil proceedings commenced against us. We offer clients and their investment managers a range of FX execution options and transparency as to our pricing methods.’’

The whistle-blowers allege the 300 municipalities potentially affected by State Street overcharges on foreign-exchange trades held $17.8 billion in assets for 195,000 current and future retirees. They said the funds collectively had 17 percent of their assets in foreign stocks, or about $3 billion.

The lawsuit, and others like it filed around the country, allege State Street overcharged clients on millions of small foreign-currency trades by trading at the best available price of the day, telling clients it had traded at higher prices, and then pocketing the difference.

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In the State Street case, Associates Against FX Insider Trading’s members are not named, but Markopolos has acknowledged it is his case.

He and other whistle-blowers filed a similar case against Bank of New York Mellon Corp. in Massachusetts. They also filed a case in New York, where the attorney general last week sued BNY Mellon for $2 billion, alleging over-billing for foreign-exchange trading. If the money is awarded, it could be distributed to pension funds in New York and to large investors around the country.

BNY Mellon denies the New York charges and is fighting them. It had no comment on the Massachusetts allegations.

The Massachusetts state workers’ pension fund has alleged it was overcharged $29 million in foreign-exchange trading fees. But Coakley has said she won’t sue on the state’s behalf, meaning it will have to take its chances in the New York case, or in the whistle-blower case in Massachusetts without her office’s power on its side.

The Markopolos group filed the largest of its cases in California, on behalf of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, alleging State Street overcharged by $56 million. Governor Jerry Brown, when he was attorney general, took over the case for the whistle-blowers and sued State Street for $200 million, including damages and penalties.

Other foreign-exchange cases are underway in Virginia and Florida. The cases are pending.

The Securities and Exchange Commission and Massachusetts Secretary of State William F. Galvin are also investigating.

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Beth Healy can be reached at bhealy@globe.com.