March 20, 2015

DOJ Catch Of The Week — Bank Of New York Mellon

By the C|C Whistleblower Lawyer Team

This week’s Department of Justice “catch of the week” goes to Bank of New York Mellon (BNYM).  Yesterday, the Bank agreed to pay $714 million to settle charges that the bank engaged in fraud and other misconduct when providing foreign exchange (“FX”) services to its customers.  The settlement resolves lawsuits brought by the United States and New York State, private class action lawsuits brought by BNYM customers, and investigations by the Securities and Exchange Commission and the Department of Labor.

As part of the settlements with the US and New York, BNYM admits that contrary to representations to clients that it provided “best rates” and “best execution” for FX transactions, the Bank actually gave clients the worst reported interbank rates of the trading day.  See DOJ Press Release and NYAG Press Release.

The US lawsuit was brought under the Financial Institutional Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), which authorizes the US to recover civil penalties for frauds involving or affecting financial institutions.  New York State’s lawsuit was brought pursuant to the Martin Act, which permits the State to seek damages and other relief for fraud.  As outlined in the lawsuits, BNYM offers FX services to its custodial clients, for whom it holds domestic and international financial assets, including currency.  In particular,  BNYM offers the so-called standing instruction FX product, pursuant to which BNYM automatically provides currency exchange on an as-needed basis when, for example, the client buys or sells foreign assets.

According to the government, BNYM provided its clients with very limited information about how it determined what currency exchange rates would be used for standing instruction FX, and that what little information BNYM did provide to clients about pricing was false, incomplete, and/or misleading.  BNYM executives, for example, misled clients by representing that the product offered “best execution,” which is commonly understood to mean that the client receives the best available market price at the time that the currency trade is executed.  Instead of providing clients with the most favorable prices available at the time the trades were executed, however, BNYM actually gave its clients the worst prices — ones at the outer margins of the interbank daily range.  BNYM allegedly generated enormous profits from this scheme based on the “spread” between the actual interbank rate at the time of execution and the less favorable rates it gave to clients.

Under the settlements and other agreements, which still need to be approved by the court, BNYM will pay a total of $714 million, of which $335 million will be paid to the United States and New York State.  Nearly all of the payment to New York will be directed to a fund to compensate BNYM’s customers who were victims of the misconduct.  Two New York State agencies — the New York State Deferred Compensation Plan and the State University of New York — were among the victims and will be compensated for their losses.  BNYM will also pay $335 million to resolve private class action lawsuits filed by the Bank’s customers; $14 million to resolve the Department of Labor’s claims under ERISA; and $30 million to the SEC.

In announcing the settlement, a parade of government enforcers highlighted the extent of BNYM’s fraud, how the Bank’s greed trumped its obligations to its customers, and how this misconduct will not be tolerated.  Manhattan US Attorney Preet Bharara said: “The Bank of New York Mellon’s custody clients, many of whom are public pension funds and non-profit organizations, trusted the Bank to be honest about the financial services it was providing and to deal with them fairly.  BNYM and its executives, motivated by outsized profits and bonuses, breached this trust and repeatedly misled clients to believe that the pricing they were getting on foreign exchange was far better than it actually was.  . . .  The bank repeatedly deceived its customers and is paying a heavy penalty for it.  We will not hesitate to pursue and punish financial institutions and their executives who exploit their customer base to improve their bottom lines.”

Attorney General Eric Schneiderman echoed this strong message and warning: “Investors count on financial institutions to tell them the truth about how their investments are being managed. The Bank of New York Mellon misled customers and traded at their expense.  Today’s settlement shows that institutions and individuals responsible for defrauding investors will be held accountable and will face serious consequences for their wrongdoing.”

The United States’ FIRREA lawsuit arose in part from a whistleblower who filed a declaration pursuant to FIRREA.  The New York case began when a whistleblower filed a complaint with the Attorney General’s office in 2009 under the New York False Claims Act.  Attorney General Schneiderman made a point of expressing his thanks to the whistleblower for helping to bring BNYM’s conduct to light.

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