Oct. 21--California's attorney general sued Boston financial powerhouse State Street Corp. on Tuesday, claiming it had defrauded the state's two giant pension funds out of $56.6 million through currency trades.

The lawsuit by Attorney General Jerry Brown seeks penalties and triple damages for a total of more than $200 million. Brown said State Street "raided the custodial accounts" of CalPERS and CalSTRS by deliberately overcharging them on foreign currency trades since 2001.

State Street denied the allegation.

The loss alleged by Brown is relatively small for two pension funds that control a combined $329 billion in assets. But California officials, who have been waging war on East Coast financial institutions following big investment losses, said the lawsuit needed to be filed.

"It's just another example that if CalPERS is being victimized by Wall Street, we will vigorously do what we need to do, to return every dollar," said Pat Macht, spokeswoman for the California Public Employees' Retirement System.

In a July lawsuit, CalPERS accused the big three Wall Street credit rating agencies -- Moody's Investors Service, Standard & Poor's and Fitch Ratings -- of duping CalPERS into some investment deals by giving them gold-star ratings. CalPERS lost $1 billion on the deals.

Last month, Brown, who is contemplating a run for governor, issued subpoenas to the three credit raters, saying they might have broken state law by issuing high ratings to risky securities purchased by Californians.

CalPERS and CalSTRS lost a total of $100 billion in the latest fiscal year because of the crash in stocks, real estate and other investments.

In suing State Street, the attorney general is taking on a company with a reputation for caution and conservatism. State Street, which provides financial services to pension funds and other institutional investors, reported an 8 percent increase in third-quarter profits Tuesday to $516 million.

Brown said the Boston company "committed unconscionable fraud by misappropriating millions of dollars."

According to his office, the matter came to light when a sealed lawsuit was filed in April 2008 by two whistle- blowers calling themselves Associates Against FX Insider Trading. "FX" stands for foreign exchange. Brown's office investigated and concluded the claims were valid.

Brown's suit said CalPERS and the California State Teachers' Retirement System hired State Street to execute the necessary trades when they needed to swap dollars for foreign currencies, and vice versa.

State Street promised to price every trade at the so-called "interbank rate," the fluctuating prices at which major banks buy and sell currency, according to the lawsuit.

Instead, the suit said, State Street overcharged the two pension funds -- and covered its tracks by posting false figures onto electronic databases and documents submitted to CalPERS and CalSTRS.

CalSTRS issued a statement saying Brown's suit "raises serious allegations, and CalSTRS is cooperating with the attorney general."

State Street said: "We categorically deny any allegations of wrongdoing and will defend ourselves against any litigation."

The company's stock closed at $47.84, down $4.41, in trading on the New York Stock Exchange on Tuesday, but recovered 7 cents in after-hours trading.

Under California law, the whistle-blowers could collect 15 percent to 33 percent of any money recovered in the suit, said Scott Gerber, a spokesman for Brown.

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Call The Bee's Dale Kasler, (916) 321-1066. Read his blog on the economy, Home Front, at www.sacbee.com/blogs.

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