MANHATTAN (CN) – The U.S. attorney on Tuesday sued The Bank of New York Mellon for “hundreds of millions of dollars,” accusing it of defrauding clients on foreign-exchange services since 2000, and lying about it. New York’s attorney general sued the bank separately in a state court complaint that put the damage at $2 billion.
The federal complaint claims that under the bank’s “‘standing instruction’ … BNYM waits until the end of the trading day to price standing instruction currency trades” and “consistently” gives its clients “the worst rates of the day.” Meanwhile, the bank gets “more favorable prices for itself on the spot market, reaping large profits on the price differential or ‘spread.'”
During the worldwide financial meltdown that began in late 2007, “when currency prices fluctuated dramatically, the profits BNYM generated at the expense of its custodial clients were enormous,” according to the 19-page complaint.
U.S. Attorney Preet Bharara describes BNY Mellon as “one of the world’s largest custodial banks,” and says that “from at least 2000 to the present [it] has engaged a scheme [sic] to defraud custodial clients who use BNYM’s foreign exchange services.”
A custodial client is a customer whose assets are managed by the bank.
“BNYM offers a ‘standing instruction’ foreign exchange service pursuant to which BNYM automatically provides currency exchange on an as needed basis when, for example, the client buys or sells foreign securities or receives dividends on foreign securities that are repatriated to the United States,” the complaint states.
It continues: “BNYM provides its clients with very limited information about how it determines what currency exchange rates or prices will be used for standing instruction foreign exchange transactions. And what little information BNYM has provided to clients about pricing has been false, incomplete and/or misleading. Among other things, BNYM has represented to standing instruction clients that the service is free of charge and that transactions are executed according to ‘best execution standards’ (i.e., suggesting that clients will be getting the best available rate at the time of execution), and that the transaction will fall within a specified daily price range.
“In truth, BNYM’s standing instruction service is far from free and, instead of providing clients with favorable rates within a specified daily range, BNYM waits until the end of the trading day to price standing instruction currency trades and consistently gives standing instruction clients virtually the worst rates of the day. At the same time, BNYM obtains more favorable prices for itself on the spot market, reaping large profits on the price differential or ‘spread.’
“The large spreads BNYM has obtained on standing instruction foreign exchange trades at the expense of its clients have accounted for the lion’s share of BNYM’s profits from all foreign exchange channels. The size of the spread BNYM derives from its clients depends in large part upon volatility in currency prices; the greater the volatility, the greater the opportunity for a large spread. Indeed, during the financial crisis in 2008, when currency prices fluctuated dramatically, the profits BNYM generated at the expense of its custodial clients were enormous.
“Because BNYM does not provide time stamps to its clients indicating when during the day the trades were executed, it is extremely difficult, if not impossible, for clients to determine whether the prices they received are fair and reasonable. When clients have made inquiries of BNYM about its pricing scheme, BNYM has consistently misled them by providing false and/or incomplete information.
“As a result of this scheme, BNYM has collectively defrauded its custodial clients, which include federally insured financial institutions and/or their subsidiaries or affiliates, of hundreds of millions of dollars.”
The government seeks penalties under the Financial Institutions Reform, Recovery and Enforcement Act, 12 U.S.C. § 1833a and injunctive relief under the Fraud Injunction Statute, 18 U.S.C. § 1345.
The complaint, signed by Assistant U.S. Attorney Pierre G. Armand, lists Bharara, Lawrence H. Fogelman and James Nicholas Boeving as fellow counsel.
A few hours before Bharara sued Mellon in Federal Court, New York Attorney General Eric Schneiderman sued the bank in New York County Court. Schneiderman put the damage for the decade-long fraud at $2 billion.
More than a dozen pension plans, including New York City teachers, police and firefighters, joined as co-plaintiffs
The 12th largest bank in the United States, BNY Mellon is the world’s largest custodial bank, custodian of more than $24 trillion of client assets, according to Schneiderman’s 52-page complaint.
Schneiderman’s state complaint echoes Bharara’s federal one: “Entrusted by clients and client investment managers to buy and sell foreign currencies for them at or near the market rate at the time of the trades, the bank priced the transactions to their clients at the worst rate at which the currency had traded during the trading day rather than at the market rate at the time of the trade,” the complaint states. “The Bank then pocketed for itself the difference between the worst price of the day it had given clients and the market price existing at the time it executed the transaction.”
Schneiderman claims that the New York Mellon “engaged in a multi-pronged campaign of deception” to tell private and government clients – including pensions funds – that their currency trades went out with “best rate of the day,” “best execution” and “the interbank market rate at the time of execution.”
But the attorney general says BNY Mellon staff spoke frankly about using “the manipulated rate” on Taiwanese currency, which had been inflated by China’s state bank.
“Not content with pricing at the worst price of the day, the bank priced at least one currency, the Taiwan dollar, at a rate higher than the worst market rate, utilizing a rate for the Taiwan dollar that it knew had been artificially inflated by the Central Bank of China (‘CBC’) and which the CBC did not make available for trading. Although BNY Mellon internally referred to this rate as ‘the manipulated rate’ and recognized that its use distorted real profits and losses, it used this rate anyway to the detriment of its clients,” the complaint states.
Executive Deputy Attorney General Karla G. Sanchez said in a statement that it promised to be a “landmark” case,.
New York City attorney John Low-Beer added that New York “will use litigation to ensure that our pension funds are not shortchanged, now or in the future.”
New York City attorneys said in a statement that the case began when a whistleblower filed a complaint with the attorney general’s office. The complaint filed by FX Analytics in 2009 was sealed pending the investigation by the Attorney General’s Office.
Schneiderman made headlines recently for refusing to yield to pressure from the Obama administration to settle lawsuits against major banks for their dubious mortgage practices. California Attorney General Kamala Harris did the same.