Documents obtained by the Wall Street Journal show consternation within the bank as multiple
states began to investigate foreign exchange transaction pricing.
(December 28, 2011)—Confidential documents obtained by the Wall Street Journal (WSJ) provide a peek inside a chaotic Bank Of New York Mellon (BNY
Mellon) after allegations surfaced that it was defrauding clients on foreign
exchange (FX) transactions.
“It’s over, it’s all over,” Susan Pfister—a Pittsburgh-based
currency-trading veteran—allegedly told what turned out to be a whistle-blowing
employee, Grant Wilson, after she was informed that the bank was the subject
of investigations relating to its FX trading. The investigations center
around whether the bank defrauded pension and other institutional clients by
overcharging them on FX transactions. Historically, these investors utilized a
‘standing-instruction’ FX service, where BNY Mellon was given the ability to
handle FX trades for the clients. Whistleblower Wilson alleges that the bank’s
internal FX desk would make the required trades at a point in time which they
considered the best for the day, but would charge the end-user client—the
pension or other institutional fund or corporation—at or near the worst price
of the day.
The bank was worried about these investors moving towards a
more nuanced, negotiated model. “Selective clients are shifting their business
to a negotiated model, where margins decline by a factor of 10-20
times,” according to a memo obtained by the WSJ (Formatting in the original). “Once this is done, they will
never return to their previous model.”
The documents also assert that after BNY Mellon rival State
Street was brought under scrutiny for similar practices in 2009, BNY Mellon
altered its website, removing the words “free of charge” regarding FX
practices. The document cache obtained by the paper shows that at least one
other employee—a corporate foreign exchange salesperson—has offered to provide
information to prosecutors regarding BNY Mellon’s FX business.
The documents were submitted to the Florida State Attorney
General by Wilson as part of an effort to expose FX trading practices at BNY
Mellon. They were obtained by the WSJ
through an open-records request, the paper said. Wilson operated as an
informant for the government for upward of two years. Four other states have
joined Florida in pursuing action against the bank.
The fallout from this FX scandal has started
to show. Earlier this month, the $46 billion Massachusetts Pension Reserves
Investment Management (MassPRIM) decided
to hire Russell Implementation Services to manage a portion of the fund's
FX transactions, replacing some—although not all—of its business with BNY
Both State Street and BNY Mellon deny
any wrongdoing in the matter.