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Preet Bharara, the United States Attorney for the Southern District of New York, Eric T. Schneiderman, the Attorney General for the State of New York, Thomas E. Perez, the U.S. Secretary of Labor (“DOL”), and Andrew J. Ceresney, Director of the Division of Enforcement for the Securities and Exchange Commission (“SEC”), announced today proposed settlements of civil lawsuits against and investigations of THE BANK OF NEW YORK MELLON (“BNYM” or the “Bank”) alleging that BNYM engaged in fraud and other misconduct when providing foreign exchange (“FX”) services to its customers. Specifically, BNYM agreed to pay a total of $714 million to settle lawsuits brought by the United States and New York State, private class action lawsuits brought by BNYM customers, and investigations by the SEC and DOL, all of which concern BNYM’s misconduct in connection with its standing instruction (“SI”) FX product. As part of the proposed settlement with the United States and the settlement with New York State, BNYM admits to and accepts responsibility for conduct alleged in the civil fraud lawsuits, including that contrary to representations to clients that it provided “best rates” and “best execution,” the Bank actually gave clients the worst reported interbank rates of the trading day. BNYM must terminate its employment relationship with certain executives with responsibilities related to the SI product, including DAVID NICHOLS (“NICHOLS”), who is a defendant in the United States’ lawsuit, and must reform its practices further to improve and increase the information provided to customers. NICHOLS also admits and accepts responsibility for conduct alleged in the United States’ complaint. The proposed settlement of the United States’ civil fraud lawsuit and proposed settlements of the customer class action lawsuits are subject to court approval. The United States submitted its proposed settlement to United States District Judge Lewis A. Kaplan today for review and approval.
Manhattan U.S. Attorney Preet Bharara said: “The Bank of New York Mellon’s custody clients, many of whom are public pension funds and non-profit organizations, trusted the Bank to be honest about the financial services it was providing and to deal with them fairly. BNYM and its executives, motivated by outsized profits and bonuses, breached this trust and repeatedly misled clients to believe that the pricing they were getting on foreign exchange was far better than it actually was. The Bank, after three years of litigation, has finally admitted what was always clear from the evidence – contrary to its various representations, including a claim of ‘best rates,’ the bank in fact gave clients prices at or near the worst interbank rates reported during the trading day. The bank repeatedly deceived its customers and is paying a heavy penalty for it. We will not hesitate to pursue and punish financial institutions and their executives who exploit their customer base to improve their bottom lines.”
Attorney General Schneiderman said: “Investors count on financial institutions to tell them the truth about how their investments are being managed. The Bank of New York Mellon misled customers and traded at their expense. Today’s settlement shows that institutions and individuals responsible for defrauding investors will be held accountable and will face serious consequences for their wrongdoing. This excellent outcome also shows what can be achieved when law enforcement agencies collaborate on an important matter such as this one.”
U.S. Secretary of Labor Thomas E. Perez said: “This case is a reminder that financial institutions charged with safeguarding retirement plan assets sometimes put the institution’s interests ahead of those of the investors they represent. Today’s settlement offers more proof that when they do so, we at the department along with our colleagues at federal and state agencies will hold them accountable.”
SEC Division of Enforcement Director Andrew J. Ceresney said: “BNYM misled registered investment company clients regarding its pricing of their foreign currency transactions. The bank said that it priced transactions according to ‘best execution standards’ and at market rates at the times of the trades, but in fact priced these transactions near the end of the day at or near the worst rates reported during the entire trading day.”
On October 4, 2011, the United States and New York State each filed civil fraud lawsuits against BNYM, one of the world’s largest custody banks, alleging that BNYM engaged in a scheme to defraud custodial clients who used BNYM’s FX services since at least 2001. The United States amended its complaint in 2012 to add as a defendant NICHOLS, a Managing Director at BNYM who had responsibilities with respect to BNYM’s representations to clients about the SI product.
The United States’ lawsuit was brought under the Financial Institutional Reform, Recovery and Enforcement Act of 1989 ("FIRREA”), which authorizes the United States to recover civil penalties for frauds involving or affecting financial institutions. This Office has pioneered the use of FIRREA to civilly prosecute financial institutions and their executives for engaging in fraud. Judge Kaplan issued a landmark decision in April 2013 endorsing the Government’s use of FIRREA in this case to pursue a financial institution for engaging in fraudulent conduct affecting its own federally insured deposits by putting them at risk. Two other Southern District of New York judges have followed Judge Kaplan’s decision in other financial fraud cases brought by this Office.
New York State’s lawsuit was brought pursuant to the Martin Act, which permits the State to seek damages and other relief for fraud.
As outlined in the lawsuits, BNYM offers FX services to its custodial clients, for whom it holds domestic and international financial assets, including currency. In particular, BNYM offers the SI product, pursuant to which BNYM automatically provides currency exchange on an as-needed basis when, for example, the client buys or sells foreign assets.
The complaints allege that BNYM provided its clients with very limited information about how it determined what currency exchange rates or prices would be used for standing instruction FX, and that what little information BNYM did provide to clients about pricing was false, incomplete, and/or misleading. For example, the complaints allege that BNYM’s FX executives, including NICHOLS, misled clients by representing that the product 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 complaints, instead of providing clients with the most favorable prices available at the time the trades were executed, BNYM actually gave its SI clients the worst prices -- ones at the outer margins of the interbank daily range. According to the complaints, BNYM generated enormous profits based on the difference or “spread” between the actual interbank rate at the time of execution and the less favorable rates it gave to SI clients.
In January 2012, the United States entered into a partial settlement with BNYM resolving the Government’s injunctive claims and requiring the Bank to reform its business practices. In particular, BNYM was required, among other things, to disclose how SI transactions were priced, to make certain pricing data available to custodial clients, and to stop describing the SI product as “free” or claiming that it offered “best execution.”
Pursuant to the proposed settlements and other agreements, BNYM will pay a total of $714 million, of which $335 million will collectively be paid to the United States and New York State. Pursuant to the proposed settlement with the United States, BNYM will pay a civil penalty of $167.5 million. BNYM will similarly pay $167.5 million to the State of New York, nearly all of which will be directed to a fund that will compensate BNYM’s customers who were victims of BNYM’s misconduct. Two New York State agencies – the New York State Deferred Compensation Plan and the State University of New York (“SUNY”) – were among the victims and will be compensated for their losses.
BNYM will also pay $335 million to resolve private class action lawsuits filed by the Bank's customers.
To resolve DOL’s claims under the Employee Retirement Income Security Act (“ERISA”), BNYM will pay $14 million to the Bank’s ERISA plan customers (in addition to approximately $70 million that will be distributed to ERISA plan customers through the other settlements).
The SEC’s Division of Enforcement has reached a preliminary agreement with BNYM to recommend to the Commission a settlement of the SEC’s investigation concerning BNYM’s SI product. The settlement will include an administrative order finding that, in violation of Sections 31(a) and 34(b) of the Investment Company Act, BNYM prepared and provided its registered investment company clients with trade confirmations and monthly transaction reports that were misleading in light of the representations made because they did not specify the time the standing instruction transactions were executed or provide information about how specific rates were assigned. The proposed settlement is subject to finalization, review and approval by the Commission. Under the terms of the proposed settlement, BNYM will pay $30 million to the SEC.
In connection with the proposed settlements of the United States’ lawsuit and the settlement of New York State’s lawsuit, BNYM admits, acknowledges, and accepts responsibility for committing conduct alleged in the federal and state complaints, including the following:
1) If the client was purchasing foreign currency, the client received a price at or close to the highest reported interbank rate for that day or session (at or near the least favorable interbank price for the client reported during the trading day or session), and if the client was selling foreign currency, the client received a price at or close to the lowest reported interbank rate of the day or session (also at or near the least favorable interbank price for the client reported during the trading day or session).
2) Because SI clients received pricing at or near the high end of the reported interbank range for their currency purchases and at or near the low end of the reported interbank range for their sales, the Bank was generally buying low from, and selling high to, its own clients. The Bank recorded the difference or “spread” between the rates it gave clients and the interbank market price at the time the SI transactions were priced as “sales margin.”
1) The Bank made numerous representations to existing and potential clients concerning the SI product, including:
(i) The service provided “benefits” to its clients, including “FX execution according to best execution standards.”
(ii) The Bank “ensures best execution on foreign exchange transactions through the following mechanisms: As a major market participant, the Bank is actively engaged in making markets and taking position in numerous currencies so that we can provide the best rates for our clients.”
(iii) “Understanding the fiduciary role of the fund manager, it is our goal to provide best execution for all foreign exchange executed in support of our clients’ transactions.”
(iv) “We price foreign exchange at levels generally reflecting the interbank market at the time the trade is executed by the foreign exchange desk.”
(v) The Bank’s “primary focus is on securing the best possible rates for our clients rather than on trading for the bank’s own account.”
1) Contrary to the representations set forth above, including that BNYM offered “best rates,” the Bank gave SI clients prices that were at or near the worst interbank rates reported during the trading day or session.
2) The Bank generally did not disclose its SI FX pricing methodology discussed above to its custodial clients or their investment managers.
3) The Bank was aware that many clients did not fully understand the Bank’s pricing methodology for SI transactions.
4) The Bank was aware that many market participants equated “best execution” with best price, or considered best price to be one of the most important factors in determining best execution.
As part of the proposed settlement with the United States, NICHOLS also admits, acknowledges and accepts responsibility for conduct alleged in the United States’ complaint, including the following:
1) From 2002 through 2011, NICHOLS was a Managing Director at the Bank who, among other duties, participated in the drafting and dissemination of the Bank’s description of “best execution” and the SI product. The description was disseminated to certain existing and prospective custody clients through responses to requests for proposals (“RFP”) and in other communications, and included the following statements:
(i) “Understanding the fiduciary role of the fund manager, it is our goal to provide best execution for all foreign exchange executed in support of our clients’ transactions.”
(ii) “Since The Bank of New York Mellon is one of the largest global custodians, our clients gain the ongoing benefit of aggregation of transactions across our broad customer base; accordingly, we price foreign exchange at levels generally reflecting the interbank market at the time the trade is executed by the foreign exchange desk.”
(iii) “Best execution encompasses a variety of services designed to maximize the proceeds of each trade, while containing inherent risks and the total cost of processing.”
2) NICHOLS had oversight of the Global Markets website and approved the content, which included the following statement: the Bank’s SI clients “benefit from . . . FX execution according to best execution standards.”
3) NICHOLS understood how the Bank priced SI transactions and also knew:
(i) The Bank generally did not disclose its SI FX pricing methodology discussed above to its custodial clients or their investment managers.
(ii) Many clients did not fully understand the Bank’s pricing methodology for SI transactions.
(iii) Many market participants equated “best execution” with best price, or considered best price to be one of the most important factors in determining best execution.
As part of the proposed U.S. and State settlement, BNYM must terminate its employment relationship with executives involved in the conduct alleged in the lawsuit, including NICHOLS. BNYM must also make further reforms to its business practices by providing clients additional pricing information about new standing instruction services BNYM currently offers to clients.
Mr. Bharara thanked the New York Attorney General's Office as well as counsel for the private litigants with whom this Office cooperated to litigate the multiple FX cases against the Bank and bring them to a successful conclusion.
The United States' FIRREA lawsuit arose in part from a whistleblower who filed a declaration pursuant to FIRREA.
The United States’ case has been 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.
Assistant U.S. Attorneys Pierre G. Armand, Lawrence H. Fogelman, Jeffrey K. Powell, and Arastu Chaudhury are in charge of the case.
U.S. v. Bank of New York Mellon et al. Stipulation & Settlement