Confidential Documents: BNY Mellon FX Business “All Over” After Investigations

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.

For more stories like this, sign up for the CIO Alert newsletter. 

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 Mellon.

Both State Street and BNY Mellon deny any wrongdoing in the matter.

CVS Caremark will pay $20 million to the California Public Employees’ Retirement System, the state of Illinois, and the state of Florida over fraud allegations.

(December 20, 2011) — Rhode Island-based pharmacy and prescription drug management company CVS Caremark is set to pay nearly $20 million to settle claims that the company defrauded state pension systems in California, Florida, and Illinois.

According to the Los Angeles Times, the whistleblower lawsuits were filed by two former CVS Caremark pharmacists who accused the firm of reselling returned drugs, changing prescription orders to make them more expensive, and submitting false reports about how long it took to fill prescriptions. Despite the allegations, the California Public Employees’ Retirement System (CalPERS) hired Caremark in June to oversee a contract covering about 350,000 members of CalPERS’ PPO plan.

In reference to the whistleblower litigation alleging irregularities in Caremark practices, Ann Boynton, Deputy Executive Officer, CalPERS Benefit Programs Policy and Planning, said in a June release: “Neither CalPERS nor any of our officers or employees are party to the action, which we have carefully considered throughout our contract negotiations.”

Under terms of the settlements, CVS Caremark will pay nearly $7 million to CalPERS, $4 million to the state of Illinois, and $3 million to the state of Florida. Other money from the settlement went to plaintiff attorneys’ fees and costs, the Los Angeles Times reported.

For more stories like this, sign up for the CIO Alert newsletter. 

CalPERS spokesman Bill Madison told The Sacramento Bee that the fund is “pleased that the suit’s been resolved” but declined further comment.