BNY Mellon Finalizes Partial Settlement in FX Suit

(January 19, 2012) — BNY Mellon has agreed to a partial settlement with the Justice Department to change aspects of its disclosure policy relating to its foreign exchange services.

The bank agreed to disclose additional information on transaction pricing, Bloomberg BusinessWeek initially reported.

Both BNY Mellon and State Street reported earnings on Wednesday. While State Street revealed improved profits, shares declined as the bank failed to match Wall Street analyst expectations. At the same time, BNY Mellon revealed a fall in net income and lower foreign exchange volume.

“Foreign exchange and other trading revenue totaled $228 million compared with $258 million in the fourth quarter of 2010 and $200 million in the third quarter of 2011,” BNY Mellon reported in a statement. “In the fourth quarter of 2011, foreign exchange revenue totaled $183 million, a decrease of 11% year-over-year and 17% sequentially. Both decreases resulted from lower volumes. The year-over-year decrease was partially offset by higher volatility, while sequentially, volatility decreased.”

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The case against BNY Mellon is just one example of heightened scrutiny into custodial banks, as states and federal authorities increasingly allege that such banks cheated pension funds and private clients.

Read “Your Largest Unmanaged Exposure” in aiCIO‘s Summer Issue, in which Cynthia Steer, previously at Russell Investments and now Head of Manager Research & Investment Solutions at BNY Mellon, speaks on how she considers currency exposure the number one issue that plan sponsors have to deal with.

(January 19, 2012) — Federal prosecutors have charged seven hedge fund insider-trading suspects in a $78 million record-setting probe.

The probe was part of a five-year investigation of insider trading at hedge funds by the Federal Bureau of Investigation (FBI) and the Justice Department. United States Attorney Preet Bharara told a news conference that the illegal trade was part of a $78 million scheme involving at least seven financial industry professionals, marking the biggest transaction ever prosecuted in Manhattan.

“Today’s charges illustrate something that should disturb all of us: They show that insider trading activity in recent times has, indeed, been rampant and routine and that this criminal behavior was known, encouraged and exploited by authority figures in several investment funds,” Bharara said, according to the Associated Press. According to prosecutors, the alleged scheme, which involved trades in Dell Inc., led to a total of $61.8 million in illegal profits.

Meanwhile, the Securities and Exchange Commission (SEC) issued a released stating:

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“The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia. Investment analyst Sandeep ‘Sandy’ Goyal of Princeton, N.J., obtained Dell quarterly earnings information and other performance data from an insider at Dell in advance of earnings announcements in 2008. Goyal tipped Diamondback analyst Jesse Tortora of Pembroke Pines, Fla., with the inside information, and Tortora in turn tipped several others, leading to insider trades on behalf of Diamondback and Level Global hedge funds.”

SEC Enforcement Director Robert Khuzami continued to note that it was disturbing that the case involved senior executives at “some of the largest and most sophisticated hedge funds in the country”.

The result of the investigation: charges against at least 56 people, with more than 50 having pleaded guilty or been convicted since 2009, including Galleon Group LLC co-founder Raj Rajaratnam. Rajaratnam, the hedge-fund tycoon and co-founder of Galleon Group, was found guilty of all counts against him in early May. The counts against him included nine of securities fraud and five of conspiracy to commit securities fraud.

After hearing the evidence that Rajaratnam participated in a seven-year conspiracy to trade on illegal tips from corporate executives, bankers, consultants, traders and directors of public companies, the Manhattan jury issued the guilty verdict.

This and other cases of alleged insider-trading on Wall Street have pushed institutional investors around the world to keep a closer eye on their investments while rethinking risk controls. Many analysts believe the latest string of FBI-led probes over insider-trading draws attention to the risk controls that fund managers have integrated when dealing with third-party research providers, and the investigation may encourage them to heighten their standards.

“I think the most important control is for senior executives to clearly communicate to employees that 1) insider trading is not tolerated; and 2) employees have an affirmative duty to escalate their receipt of information that is even potentially material and non-public,” Joshua E. Broaded, principal consultant at ACA Compliance Group, told aiCIO in late 2010, after three hedge funds were raided the previous month as part of a probe by the FBI, the Manhattan US Attorney’s office, and the SEC.