Bloomberg News

BNY Mellon Sued by California Funds Over Foreign Exchange Costs

October 27, 2011

Oct. 27 (Bloomberg) -- Bank of New York Mellon Corp., the world’s largest custody bank, was sued by pension funds in California over allegations that it overcharged for foreign- exchange transactions.

The state False Claims Act lawsuit, filed in 2009, was unsealed yesterday in state court in Alameda County, California, the law firm Cotchett Pitre & McCarthy LLP said in an e-mailed statement. The firm represents employee retirement funds in Los Angeles.

The funds in Los Angeles and other California counties claim that BNY Mellon said it would use “best practices” when executing foreign exchange transactions to give its clients the highest price when in fact it used the least advantageous prices and secretly profited from the difference.

Massachusetts’s Secretary of the Commonwealth William Galvin yesterday filed an administrative complaint against the bank over similar allegations following lawsuits brought by the attorneys general of New York, Virginia and Florida and the U.S.

BNY Mellon used “a hidden scheme that rigged the pricing of non-negotiated foreign-exchange transactions while maximizing profits for the bank,” Galvin said in a statement.

Massachusetts Treasurer Steven Grossman said in June that New York-based BNY Mellon overcharged the state’s public pension system by $30.5 million since 2000.

‘Baseless Allegations’

Kevin Heine, a spokesman for BNY Mellon, said the Massachusetts complaint “recycles baseless allegations” and the bank is confident it’s “right on the facts and on the law.” Heine didn’t immediately return a voice-mail message left after regular business hours yesterday seeking comment on the California lawsuit.

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

State Street Corp., based in Boston and a BNY Mellon rival, faces similar claims from California and Arkansas.

All the 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 said they acted as a principal, selling one currency for another in arms-length transactions at a set price 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 reported $221 million in foreign exchange revenue in the third quarter, about 6 percent of its total. The bank earned $651 million in the quarter.

The case is In Re Bank of New York Mellon False Claims Act Litigation, RG09480749, Alameda County Superior Court

--With assistance from Christopher Condon in Boston and David McLaughlin in New York. Editors: Fred Strasser, Mary Romano

To contact the reporters on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net; Charles Stein in Boston at cstein4@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net


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