The attorney general of New York and the city of New York are suing BNY Mellon for close to $2 billion, claiming the custodian overcharged public and private pension funds on foreign exchange fees for as much as a decade.
The issue was revealed to New York Attorney General Eric T. Schneiderman by whistleblower FX Analytics in 2009, but has remained under wraps until late Tuesday as the attorney general investigated the matter. Schneiderman took over the case and added additional claims, according to a statement from his office. FX Analytics is the same whistleblower group that made claims against BNY Mellon in Virginia, which led to a practically identical lawsuit against the custodian by the Virginia attorney general.
Specifically, the lawsuit claims BNY Mellon misrepresented the FX rates it would charge its customers. Instead of providing the best interbank rates as it promised BNY Mellon gave the worst or nearly the worst rates of the trading day, according to the statement from the attorney generals office. The bank made nearly $2 billion from these trades, accounting for over 65% of its foreign exchange revenues.
The lawsuit is on behalf of clients who utilized BNY Mellons Standing Instructions program, whereby the custodian would charge the best or most competitive FX rate of the day for client transactions. In reality, claims the attorney general, the bank provided the opposite: the worst or nearly the worst of the pricing rates available to the bank that day. Schneiderman claims to have sworn testimony from BNY Mellon employees that the bank neither sought the best rates for Standing Instructions clients nor provided best execution.
The lawsuit claims BNY Mellon therefore profited by pocketing the difference between the actual FX price at the time of the FX transactions and the price charged to customers, to the tune of nearly $2 billion over a period of a decade.
The firms Standing Instructions service is similar to the indirect FX service offered by State Street over which that custodian is being sued by the attorney general of California. The claims in that lawsuit are practically identical to those in the latest suit against BNY Mellon. State Street has since reformed its indirect FX service, which since 2009 has provided more transparent data to clients on the pricing of FX fees. (A spokesperson from CalPERS, the California pension on behalf of which the attorney general is suing State Street, told Global Custodian earlier this year that the pension no longer uses the indirect FX service and pre-negotiates almost all of its FX transactions or carries out the transactions in-house.)
The New York attorney general claims BNY Mellons deceptive Standing Instructions transactions were seven times more profitable than the transactions that were directly negotiated with clients, earning an average of 15 extra basis points on each transaction. While the Standing Instructions program accounted for only 20% of BNY Mellons foreign currency exchange transactions, it equaled 65-75% of its foreign exchange sales revenue, claims the attorney generals statement.
The attorney general, along with the City of New York, are suing for $12,000 per FX transaction, which the statement says amounts to nearly $2 billion.
BNY Mellon said in a statement it would vigorously defend [itself] against baseless claims, saying the attorney generals lawsuit represents a fundamental misunderstanding of the role of custodian banks and the operation of FX markets. The attorney general is in essence attacking BNY Mellon for operating a profitable business, suggesting that we should provide our valuable FX services at cost something no rational commercial institution would do, the firm said in a statement issued shortly after the lawsuit became public Tuesday evening.
While we recognize that capitulating to the [attorney general] offices demands might avoid some nasty headlines, we refuse to be coerced into admitting to and paying for wrongdoing that does not exist, the firm continued.
Click here to read the full statement by BNY Mellon and click here for the full lawsuit filing [PDF].
Christopher Gohlke