Bloomberg News

BNY Mellon ‘Sledgehammer’ Lawsuits Raise Pressure to Settle

October 05, 2011

(Updates shares in fifth paragraph, adds attorney’s comments in 10th and 13th.)

Oct. 5 (Bloomberg) -- Bank of New York Mellon Corp., the largest custody bank, faces increased pressure to reach settlements on foreign-exchange cases following new lawsuits brought by New York and federal officials.

The New York attorney general and the U.S. Attorney’s Office in Manhattan, each of which filed complaints yesterday, bring deeper resources and more expertise on financial cases, Barry Barbash, head of the asset-management group at law firm Willkie Farr & Gallagher LLP, said in an interview from his Washington office. New York Attorney General Eric T. Schneiderman can also wield the state’s powerful Martin Act, he said.

“The Martin Act is a fairly significant sledgehammer of a statute” that makes it easier for prosecutors to prove fraud compared with many other states’ laws, said Barbash, a former director of the U.S. Securities and Exchange Commission’s division of investment management.

The New York suit, brought yesterday in the state’s Supreme Court, accuses BNY Mellon of defrauding public pension funds of $2 billion over 10 years. The U.S. Attorney’s Office filed a separate suit in federal court. Florida and Virginia have also filed claims against the bank and Massachusetts regulators are investigating similar claims.

The bank fell 54 cents, or 2.9 percent, to $18.28 at 4:15 p.m. in New York Stock Exchange composite trading. It has lost 39 percent this year, compared with the 30 percent decline by Standard & Poor’s 19-company index of asset managers and custody banks.

‘Flawed Analysis’

BNY Mellon will fight the lawsuits, said Kevin Heine, a spokesman for the bank. The complaints are based on a “flawed analysis” and a misunderstanding of the global foreign-exchange market, he said.

State Street Corp., the third-largest custody provider, faces similar lawsuits from California and Arkansas. The Boston- based firm has said it will defend itself against the claims.

Northern Trust Corp., based in Chicago and the fourth- biggest custody bank, hasn’t been named in any foreign-exchange- related lawsuits, the company said. New York-based JPMorgan Chase & Co., the second-largest, didn’t immediately respond to an e-mail asking if it had been sued.

Schneiderman alleged in his complaint that BNY Mellon violated the Martin Act, New York state’s securities fraud statute, which doesn’t require proof of intent as a prerequisite to proving an act of fraud.

‘Pretty Darn Broad’

“It’s pretty darn broad,” Peter Pope, a partner in New York for the law firm Jenner & Block LLP, said of the Martin Act in a telephone interview. “It encompasses ‘all deceitful practices contrary to the plain rules of common honesty’,” he said, quoting from case law.

Barbash said the two new plaintiffs may represent tougher opponents to BNY Mellon than other litigants.

“These two formidable government agencies potentially change the dynamic of the lawsuits and may put more practical pressure on the banks to settle,” Barbash said. “Being in the center of New York, they can draw from a greater talent pool and may be more sophisticated in terms of their knowledge and experience on financial cases.”

Pope, who led the criminal division of that office under former New York Attorney General Eliot Spitzer, agreed, adding, “Historically, when the attorney general of New York gets involved in a case, it brings a huge amount of additional enforcement attention to the issue.”

Neither Barbash’s firm nor Pope’s represent any of the parties involved in the litigation.

Standing Instruction

All the states’ cases center on the pricing of small foreign-exchange transactions handled automatically by the custody banks on behalf of the pension funds, a service known as standing instruction.

The banks have claimed they acted as a principal, selling one currency for another in arms-length transactions at a price they set that customers were free to accept or reject. The plaintiffs have claimed the banks were obliged to act as an agent, obtaining for them the best possible exchange rate in the interbank currency market, and misled clients on how they set prices.

BNY Mellon defrauded thousands of clients nationwide, according to the New York complaint. Victims included public and private pension funds and federally insured financial institutions, officials said in court papers and in statements. New York City pension funds, including the Teachers’ Retirement System of the City of New York, lost tens of millions of dollars, they said.

Heightened Anxiety

Equity analysts covering BNY Mellon said the new suits will increase shareholder worries without necessarily exposing the bank to significantly higher financial risk.

“Will it heighten anxiety? It probably does,” Marty Mosby, a Memphis, Tennessee-based analyst with Guggenheim Securities LLC, said in a telephone interview. “But it still doesn’t mean they did anything that wasn’t in the legal agreements.”

“We believe the likelihood the $2 billion claim will be awarded is minimal,” John Stilmar, an analyst with SunTrust Robinson Humphrey Inc. in Atlanta, wrote in a research note published today. “We believe the FX operations may be misunderstood by the states suing the trust banks, and punitive penalties will not be as much as current headlines.”

BNY Mellon said in July that pretax revenue from standing instruction foreign-exchange transactions for public pension funds in 2011 will total about $36 million, Stilmar wrote, which is “dramatically lower than the attorney general’s claim.”

Foreign-Exchange Revenue

“The New York State attorney general is working hard to find ways to sue banks,” Richard X. Bove, an analyst with Rochdale Securities LLC in Lutz, Florida, said in a telephone interview. “I am sure he will come up with more. New York seems to have a burning need to drive out as many financial companies as it can.”

BNY Mellon reported $184 million in foreign-exchange revenue in the second quarter, about 5 percent of total revenue. Roughly 40 percent of that revenue, or about 2 percent of total revenue, came through standing instruction, according to Heine, the spokesman.

Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. They also manage investments for individuals and institutions.

--Editors: Steven Crabill, Christian Baumgaertel

To contact the reporters on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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