Bank of New York Agree to Partial Settlement in Civil Fraud LawsuitJan 21st, 2012 | By HV Insider | Category: Featured Articles
A partial settlement of the civil fraud lawsuit the United States filed against the BANK OF NEW YORK MELLON CORPORATION (“BNYM”) that will require BNYM to reform certain business practices. Specifically, BNYM will change the disclosures it provides to clients about its foreign exchange services. Pursuant to the partial settlement, BNYM must disclose how transactions executed through its standing instruction foreign exchange service are priced, and must make certain pricing data available to its custodial clients on a periodic basis.
In addition, BNYM may no longer describe the standing instruction service as “free,” or represent that the service applies “best execution” standards. The settlement was approved today by United States District Judge Lewis A. Kaplan.
On October 4, 2011, the United States filed a civil Complaint alleging that BNYM, one of the world’s largest custody banks, engaged in a scheme to defraud custodial clients who have used BNYM’s foreign exchange services since at least 2000. The Complaint seeks hundreds of millions of dollars in civil penalties under the Financial Institutional Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), and injunctive relief under the Fraud Injunction Statute.
As outlined in the Complaint, BNYM offers foreign exchange services to its custodial clients, for whom it holds domestic and international financial assets, including currency and securities. In particular, BNYM offers a “standing instruction” foreign exchange service pursuant to which BNYM automatically provides currency exchange on an as needed basis when, for example, the client buys or sells foreign securities or receives dividends on foreign securities that are repatriated to the United States.
The Complaint alleges that BNYM has provided its clients with very limited information about how it determines what currency exchange rates or prices will be used for standing instruction foreign exchange, and that what little information BNYM has provided to clients about pricing has been false, incomplete and/or misleading. For example, the Complaint alleges that BNYM has misled clients by representing that the service offered “best execution,” which is commonly understood to mean that the client receives the best available market price at the time that the currency trade is executed. As explained in the Complaint, instead of providing clients with the most favorable prices available within a specified daily range, BNYM actually gives its standing instruction clients less favorable prices that lie at the outer margins of the interbank daily range. According to the Complaint, BNYM simultaneously trades for its own account at more favorable rates and generates enormous revenues on the price differential or “spread.”
The settlement resolves the Government’s claim in the lawsuit seeking an order compelling BNYM to change its current disclosures to clients about the standing instruction service. Specifically, the injunctive relief ordered by the Court requires BNYM to make the following changes to its disclosures:
• BNYM must disclose how it prices standing instruction transactions. Among other things, BNYM must represent that: unless an alternative arrangement is agreed upon, BNYM assigns prices to standing instruction clients that are at or near the high and low ends of the daily ranges of prices reported in the interbank market; and that BNYM’s pricing of standing instruction transactions is generally less favorable to clients than directly negotiated trades. BNYM acknowledges under the settlement that these representations are true.
• BNYM must provide custodial clients with a mechanism to compare the average pricing of standing instruction transactions with trades for non-restricted currency pairs at a particular point in time.
• BNYM may not represent that the standing instruction service is offered according to “best execution” standards.
• BNYM may not represent that the standing instruction service is “free.” BNYM may state that it does not charge a separate fee or commission, but must disclose that it earns revenues from the different prices it obtains when trading for its own account.
• BNYM may not represent that it offers netting of transactions unless certain criteria are met.
• BNYM may not represent that all standing instruction clients receive the same pricing.
The parties intend to continue litigating the Government’s claim for civil penalties.
Accordingly, nothing in the settlement releases claims of the United States, and BNYM likewise denies liability.
The case is being handled by the Office’s Civil Frauds Unit. Mr. Bharara established the Civil Frauds Unit in March 2010 to bring renewed focus and additional resources to combating financial fraud.
The Civil Frauds Unit works in coordination with President Barack Obama ‘s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and -Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
Assistant U.S. Attorneys Pierre G. Armand, Lawrence H. Fogelman, and James Nicholas Boeving are in charge of the case.