Bank of New York Mellon and State Street Bank were hired in early 2010 by then state Treasurer Kevin Boyce, a Democrat, to handle the international assets for the Ohio Public Employees Pension System, State Teachers Retirement System, Ohio Police & Fire Pension System and School Employees Retirement System. Almost 406,000 retirees, beneficiaries and dependents currently draw from the four pension funds.
At the time, the Boyce administration said State Street Bank was the low bidder and the move would save millions of dollars in fees. But just two days before the proposals were due in 2010, the Boston-based bank hired an immigration attorney with little experience in banking or lobbying to lobby for the contract. The attorney had personal ties with Boyce’s deputy treasurer.
Mandel, a Republican who took office in January 2011, raised concerns about the contracts with State Street and Bank of New York Mellon when he was running for state treasurer.
Kevin Heine, a spokesman for Bank of New York Mellon, said Monday the company was disappointed by the treasurer’s action because “we believe we have provided the state with valuable services at competitive prices.”
Heine said the state’s lawsuit “recycles baseless allegations.”
“We are confident we are right on the facts and the law,” he said.
Mandel said in a written release that the decision was made because of the fraud allegations against Bank of New York Mellon and State Street Bank.
“The pattern of fraud that has been detailed and alleged across the country against banks entrusted to safeguard funds for Ohio teachers, police, firefighters and retirees is an extreme breach of the public trust,” Mandel said. “I have been fighting against abuse and corruption in banks that serve as international custodians for Ohio pension funds for the last two years, and as treasurer I feel that I have a duty to end custodial agreements with banks being sued for defrauding taxpayers.”
Mandel is running for U.S. Senate against incumbent Democrat Sherrod Brown in November.
“He should have done something on day one in office,” said Justin Barasky, spokesman for Brown’s re-election campaign. “It took him more than 14 months for him to finally say ‘We’ll stop dealing with them’?”
Mandel made the announcement Monday, the same day that he attended his first Board of Deposit meeting as treasurer. He did not attend the first 14 monthly meetings.
It is unclear how much money JPMorgan and CitiBank will be positioned to make in fees from the new contracts, which have yet to be negotiated. The deal also puts them in line to earn more money for services provided to the pension systems.
Switching custodial banks involves a great deal of work for the pension funds and the treasurer’s office, said Seth Metcalf, general counsel for Mandel’s office.
“It is not something that is done lightly because it can require quite a bit of work. It’s not like just flipping a switch,” Metcalf said.
Pension officials said transitioning to a new custodial bank can take six to nine months as details are ironed out about information flow, data formats and other requirements.
Ohio Police & Fire Pension Fund spokesman David Graham said custody fees are “likely to increase substantially” and there may be asset transfer and auditing costs associated to the move.
The Ohio lawsuit against Bank of New York Mellon alleges that the bank collected currency trades for clients and later in the day set the price most favorable to the bank.
By law, custodial bank contracts must be bid out every two years but the custodial subcontracts for international assets may be awarded at the treasurer’s discretion.
The Associated Press contributed to this report.
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