(Updates shares in fourth paragraph.)
Oct. 5 (Bloomberg) -- Bank of New York Mellon Corp. was sued by the U.S. Attorney’s Office in Manhattan and the New York attorney general for allegedly defrauding clients in foreign currency trades.
The bank earned $2 billion through a 10-year fraud in which it misrepresented to customers its pricing practices, according to a complaint by New York Attorney General Eric Schneiderman and the City of New York. The U.S. Attorney’s Office filed a separate suit in federal court.
“From at least 2001 to the present, the bank has engaged in a multipronged campaign of deception,” the state and city said in their complaint in state Supreme Court in Manhattan.
BNY Mellon fell 67 cents, or 3.6 percent, to $18.15 at 11:47 a.m. in New York Stock Exchange composite trading after dropping as much as 4.5 percent.
The bank’s scheme 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.
Florida, Virginia Lawsuits
The lawsuits come after attorneys general in Florida and Virginia sued BNY Mellon in August. Like New York, those states allege the bank overcharged public retirement funds in foreign exchange transactions. The New York complaint supersedes, or replaces, a whistleblower lawsuit filed in 2009, Schneiderman’s office said in a statement.
BNY Mellon will fight the lawsuits, said Kevin Heine, a spokesman for the bank. The complaints are based on the same “flawed analysis” and a misunderstanding of the global foreign exchange market, he said.
“Simply put, this is the kind of prosecutorial overreach that ill serves New York, New Yorkers and the pension funds that the Office of the New York Attorney General purports to represent,” Heine said in an e-mailed statement.
The lawsuits may add to legal expenses at BNY Mellon, which is already suffering from rising costs. The bank five weeks ago named Gerald L. Hassell to replace Robert P. Kelly as chief executive officer. Kelly, who had run the company since 2007, stepped down in “mutual agreement” with the board, the firm said Aug. 31, without giving a reason.
Custody banks including BNY Mellon have been hurt by persistent low interest rates, which reduce income from lending cash and securities and cut fees from money-market funds. The U.S. Federal Reserve has kept its main lending rates close to zero since December 2008 to try to revive the economy.
In a conference call with investors in July, Kelly described expense growth at the bank as “too high,” citing rising costs for pensions, compensation, health care and legal bills. The bank said Aug. 10 it planned to cut 1,500 jobs, or 3 percent of the workforce, to address escalating expenses.
Rival State Street Corp., the third-largest custody bank, has faced similar claims over foreign currency trades. The Boston-based bank has cut more than 2,000 jobs in the past year to reduce expenses.
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.
BNY Mellon defrauded clients that used its “standing instruction” foreign exchange service under which the bank automatically provides currency exchange when the client buys or sells foreign securities, according to the complaint by the U.S. Attorney’s Office.
BNY Mellon determines the price clients receive on the currency trades and consistently gives them “virtually the worst rates of the day,” federal prosecutors said. The bank obtains more favorable prices for itself on the spot market and pockets the difference. BNY Mellon’s conduct was most egregious during the 2008 financial crisis when currency prices were volatile.
“This unprecedented volatility allowed BNYM to pass on extremely poor pricing to its clients while earning massive gains on the much better pricing BNYM was able to obtain on the spot market,” the government said in its complaint.
“Unfortunately, the U.S. Attorney does not appear to have made any serious independent effort to assess the validity of the claims in this lawsuit,” Heine said. “We will fight these claims vigorously and are confident we will prevail.”
The cases are U.S. v. Bank of New York Mellon Corp., 11- 06969, U.S. District Court, Southern District of New York (Manhattan), and People of the State of New York v. The Bank of New York Mellon Corp., 114735-2009, New York State Supreme Court (Manhattan).
--With assistance from Christian Baumgaertel in Boston. Editors: Peter Blumberg, Michael Hytha
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