(January 11, 2012) — After months of controversy surrounding issues over foreign exchange transactions, BNY Mellon, the world’s largest custody bank, is continuing to work toward a settlement as part of a lawsuit filed by federal prosecutors.
The suit against the bank alleges that it fraudulently overcharged clients for currency trades, with the lawsuit aiming to resolve the way BNY Mellon discloses the pricing of those transactions. Following a request for a one-week extension in the federal case that was granted on January 9, judge told the US attorney and the bank in a note obtained by aiCIO that “parties should not expect another extension from the court.”
As part of the suit, Manhattan US Attorney Preet Bharara, who filed the suit in October, is seeking damages of hundreds of millions of dollars. If a settlement is reached, sources say the suit may eventually offer a roadmap to better resolve other lawsuits over currency transactions.
The bank is embattled with an array of state-government suits around the United States seeking more than $2 billion in damages in regards to its currency trading on behalf of clients. While state and public pension funds continue to accuse the bank of cheating them on currency transactions, the custody bank has repeatedly denied wrongdoing and has vowed to fight the suits.
Last month, BNY Mellon asked a court to dismiss New York’s currency-trading suit.
The custodial bank revealed in a court filing that it accurately reported the exchange rates it applied to preauthorized foreign currency transactions. “A party that knows exactly what it is getting, and at what price, cannot, as a matter of law, have been defrauded,” the company said in papers filed in New York State Supreme Court in Manhattan.
According to the court documents, if BNY Mellon omitted its profit margin on its trades along with how it came to specified exchange rates, the bank “had no duty to disclose it,” Reuters initially reported.
Also last month, confidential documents obtained by the Wall Street Journal (WSJ) provided a peek inside a chaotic BNY Mellon after allegations surfaced that it was defrauding clients on foreign exchange 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 documents also asserted 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 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.